Small-business owners frustrated by getting cut out of the stimulus program will soon get another chance at emergency funding.

The Main Street Lending Program became known as Plan B for small companies so far shut out of the Paycheck Protection Program--the forgivable loan program aimed at helping besieged small businesses keep employees on the payroll. But after the Federal Reserve announced several key changes to it Thursday, for many it may well become Plan A. 

After a comment period that attracted more than 2,200 letters, the Fed today announced it would widen the eligibility requirements to include both smaller and larger businesses. It also said it would reduce the available loan size for eligible borrowers, and it simplified the pricing of the loans. The program was first announced on March 23 and a working proposal was unveiled on April 9.

"It's a step in the right direction," says Chuck Morton, partner and co-chair of the corporate group at Venable, a Washington, D.C.-based law firm. "Businesses who've been trying to navigate the complicated alphabet soup [of Covid-19 relief programs] should look at this program. And look at it in conjunction with their existing lenders to see if this additional borrowing could be helpful."

The Main Street Lending Program, which still has no launch date but Fed chairman Jerome Powell on Wednesday said would roll out "soon," is aimed at small and midsize businesses that were in good financial standing before the crisis. It is expected to run directly through federally insured depository institutions, including banks, savings associations, and credit unions, and the Fed says it will support up to $600 billion in new loans. Business owners who have received PPP loans are permitted to apply. 

The program contains three different facilities: one for new borrowers, one for borrowers who may have existing debt but lower fiscal needs, and one for borrowers who have an existing loan or credit line with outsize fiscal needs. None of these facilities contain a minimum company size requirement for eligibility, so self-employed business owners and companies with fewer than 500 employees may apply. While there are revenue requirements, as of Thursday those are now reduced.

Here's more on that, along with other key changes:

  • Companies need to have at minimum around $83,000 in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2019 and no debt. Companies with debt have higher adjusted EBITDA requirements. Previously, companies needed to generate at least $250,000 in adjusted EBITDA to be eligible. The upper-end range of companies includes those with as much as $5 billion in annual revenue or fewer than 15,000 employees. That's up from a maximum of $2.5 billion in annual revenue and 10,000 employees.
  • The minimum loan amounts have also come down. For two of the three facilities, the minimum loan amount is now $500,000, down from $1 million. The third facility offers loans that start at $10 million.
  • Pricing for these loans also has changed. Main Street loans, which must be repaid, carry interest charges, which are variable--and equal to LIBOR + 300 basis points--but are now flat across all three loan facilities. Currently, that means rates are around 3 percent. Under the original terms of loans, rates were again variable, but they were based on a different interbank lending rate and the basis points ranged, which meant loans could have rates from 2.5 percent to 4 percent. 
  • While borrowers still will have four years to repay the loans, the repayment terms will differ depending on the lending facility they elect. The program for new borrowers, for instance, requires 33 percent of the loan to be repaid in years two, three, and four. For the other two facilities, borrowers need to repay 15 percent in years two and three. In year four, borrowers must repay 70 percent. Loan payments can be deferred for up to one year.

Main Street vs. PPP

Perhaps the biggest attribute of the Main Street Lending Program is the lack of specific requirements for how companies can use the money. Though, it should be noted that there are plenty of other restrictions, which might make the loan less attractive depending on how your company operates.

Business owners vying for PPP loans have been grappling with how to address the requirements of the program, which include maintaining pre-crisis head counts and devoting at least 75 percent of a loan's proceeds to paying the salaries of employees, who may not be able to work because a business has been shuttered by the state. While the loans are forgivable if these conditions are met, some business owners who've received the loans say bringing employees back is sometimes a challenge. Employees may be reluctant to return as unemployment benefits may be worth more than what they might make on the job. 

By contrast, the Main Street Lending Program encourages business owners to make "reasonable efforts" to maintain payroll and retain their employees during the term of the loan, but there is no hard and fast requirement to do so. In other words, if business owners need to devote the majority of their loan to something other than paying salaries, rent, or making mortgage interest payments, this may be the better program.

Of course, unlike the PPP, Main Street loans are not forgivable. So they really aren't ideal for businesses that were teetering on the edge before the crisis, says Joe Brusuelas, chief economist at RSM, a consultancy focused on middle-market businesses in Chicago. "Those small firms need grants, not loans," he says.  

The Risk for Small Business

An additional wrinkle--and one that could squeeze out smaller businesses--is the expansion of the program to include even bigger businesses. Allowing companies with as much as $5 billion in revenue or fewer than 15,000 employees to access the Main Street Lending Program could open it up to the same level of competition from larger companies as befell the PPP. After that program launched on April 3, investigations into PPP showed that more than 200 public companies accessed the program--collecting hundreds of millions in funding that was supposed to be reserved for small businesses.

Morton expects that the Fed will continue to refine the Main Street Lending Program, just as U.S. Treasury and Small Business Administration have done with PPP. So this likely isn't the last update you'll see on this new loan program.