Main Street Lending Program vs. PPP: Which Is Better for Your SMB?

Thanks to intense and frequent promotion, most owners of SMBs know about as the Paycheck Protection Program (PPP), especially now that PPP rules have been relaxed, making loans easier to use by those who get them. However, another government loan, known as the Main Street Lending Program (MSLP), hasn't received the same amount of publicity, even though it too has just been modified to allow more SMBs to obtain help.

If you're the owner of a small or medium-sized business looking for financial assistance in the wake of COVID-19, you should know about both programs, how they compare, and when the application deadlines are. Spoiler alert: They're soon (Sept. 30) for MSLP and very soon (Aug. 8) for PPP.

Basics of the PPP Loan

The Paycheck Protection Program (PPP) is a special new type of SBA 7(a) loan program designed to provide American small businesses with financial assistance via 100% federally guaranteed loans. Created by Section 1102 of the CARES Act, it was recently updated by the PPP Flexibility Act (PPPFA) of 2020 to make PPP loans more useful to small businesses.

The main points of the upgraded PPP loan program are:

• Virtually all small businesses (under 500 employees) are eligible including self-employed individuals.
• The loan can be for up to 2.5 times your 2019 average monthly payroll cost capped at $10 million. There is no loan minimum.
• All or part of the loan can be forgiven provided 60% is spent on payroll and up to 40% is spent on mortgage interest, rent, or utility payments.
• Any unforgiven eligible portion of the loan matures in five years at a 1% interest rate.
• Any ineligible portion may have to be repaid immediately.
• Principal, interest, and fees are deferred until SBA notifies your lender of the forgiveness amount (or for 10 months after the end of the covered period if you don't apply for forgiveness).
• Unpaid interest accrues.
• No collateral or personal guarantee is required.
• You can use the funds for up to 24 weeks to obtain forgiveness, but not beyond Dec. 31, 2020.
• The covered period, Feb. 15, 2020 - Dec. 31, 2020, is the maximum allotted time to cure (retain or rehire) full-time equivalency (FTE) employees to gain forgiveness of your loan.
• Three exceptions to the requirement to reemploy all FTEs are granted for employees who turn down reemployment, your inability to find a qualified replacement, and COVID-19 legal restrictions that prevent you from retaining or rehiring employees.
• You can delay paying your share of payroll taxes under the CARES Act even if you take a PPP loan.
• There is no penalty for prepayment of your loan.

Full information on the original Paycheck Protection Program is available on the SBA PPP website. A joint statement by SBA Administrator Jovita Carranza and U.S. Treasury Secretary Steven T. Mnuchin, issued June 8, 2020, outlines changes to the original PPP loan program made by the Paycheck Protection Program Flexibility Act.

Basics of the Main Street Lending Program (MSLP)

The Main Street Lending Program (MSLP), sponsored by the Federal Reserve, is intended to help both small and medium-sized businesses that were healthy before the coronavirus pandemic. The idea is to provide loans to companies that did not receive a PPP loan and did not have access to other capital. However, if your business did receive a PPP loan, you are still eligible to apply for and accept a Main Street Lending Program loan. As with PPP, the Main Street Lending Program has also tweaked guidelines to allow more SMBs to participate.

The MSLP is broken down into three parts - the Main Street New Loan Facility (MSNLF); Main Street Priority Loan Facility (MSPLF); and Main Street Expanded Loan Facility (MSELF). MSNLF and MSPLF are for new loans. MSELF is for expanding an existing loan.

Main Street Loan Terms

The common points of all three programs are:

• To be eligible your company must have been a U.S. business, established before March 13, 2020, with 15,000 employees or fewer OR had 2019 revenues of $5 billion or less.
• Your company must not be ineligible for a PPP loan, except regarding the number of employees.
• Your company must also have EBITDA of $250,000 and no debt.
• Loans are not forgivable.
• Loans have a five-year maturity date.
• Principal can be deferred for 24 months, interest for 12 months.
• Unpaid interest accrues.
• Collateral is required.
• Interest rate is the secured overnight financing rate (SOFR) plus 3%.
• The Fed will buy up to 95% of eligible lender-originated MSLP loans with lenders keeping the other 5%.
• Lenders apply their own underwriting standards meaning otherwise qualified borrowers will not automatically receive a loan.
• There's no penalty for prepayment of your loan.
• You can use the money for any financial hardship caused by COVID-19, however you must make "reasonable efforts" to main payroll and retain existing workforce."
• You cannot use the funds to pay off existing debt.
• There is no prepayment penalty.

Distinctions in the Main Street Loans

The programs differ when it comes to minimum and maximum loan size.

• MSNLF: Minimum loan size is $250,000. Maximum loan is $35 million or four times your 2019. EBITDA minus existing outstanding and undrawn available debt.
• MSPLF: Minimum loan size is $250,000. Maximum loan is $50 million or six times your 2019. EBITDA minus existing outstanding and undrawn available debt.
• MSELF: Minimum loan size is $10,000,000. Maximum loan is $300 million or six times your 2019. EBITDA minus existing outstanding and undrawn available debt.

Details of the Main Street Lending Program are contained in the MSLP FAQ sheet.

Note that the MSLP has not officially started yet. The Federal Reserve says only that it will begin "within days."

Comparing the MSLP AND PPP

Generally speaking, the Main Street Lending Program was designed for medium-sized businesses and the Paycheck Protection Program was designed for small companies. Here's a side-by-side comparison of major components may be helpful.

Generally speaking, PPP loans , if one fits your needs and you can follow spending restrictions, is a better deal. After all, free is free. But if you need more funds, more spending flexibility, and can manage the payments, the low interest rate and 5-year term on a Main Street Lending Program loan is a good deal as well.