Federal Government Expands Access to Loans for Small and Midsize Businesses Under Title IV of the CARES Act

By Freed Maxick on April 14, 2020
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Title IV of the Coronavirus Economic Stabilization Act of 2020 (CARES) provides $600 billion into the new Main Street Business Lending Program to provide support for small to mid-sized business.

Under certain conditions and with appropriate certifications, your business may be eligible under the CARES Act to receive a loan through the federal government to help you through the Covid-19 crisis. Although funds under the Main Street Business Lending Program have not yet been distributed, guidance for borrowers has been issued in preparation for the funding flow to be initiated. As member of the RSM US Alliance we can share an overview of the program from RSM US, LLP by clicking here.

Am I eligible?

Eligible borrowers are businesses with up to 10,000 employees or up to $2.5 billion in 2019 revenues. Each eligible borrower must be a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States. Companies that have taken advantage of the Paycheck Protection Program may also take out Main Street loans.

What are the 2 types of Main Street Loan Facilities available to eligible borrowers and how much can I borrow? 

The Main Street New Loan Facility (MSNLF) is for new loans that originate after April 8, 2020 with a minimum loan of $1 million to a maximum loan of $25 million. Borrowing under this facility is for eligible businesses who do not have existing outstanding loan obligations except an undrawn debt obligation such as a line of credit. Borrowings cannot not exceed four times 2019 EBITDA as defined in the regulations.

The Main Street Expanded Loan Facility (MSELF) allows for banks to increase the size of existing outstanding loans issued prior to April 8, 2020, rather than issue a new loan. The loan size ranges up to $150 million and is capped at a maximum of 30% of the borrower’s existing outstanding debt obligations and committed but undrawn debt. Borrowings cannot exceed six times the borrower’s 2019 EBITDA.

An eligible business may not participate in both the Main Street Loan programs.

What’s the term and interest rate for loans?

Interest rates on both loan programs are at an adjustable rate of the Secured Overnight Financing Rate (SOFR) plus 250 to 400 basis points. The loan is a four-year maturity with principal and interest deferred for one year.

What certifications do I need to make?

In order to secure a loan, the Act requires that eligible businesses participating must be able to certify that:

  • You must attest that the proceeds of the eligible loan will not be used to repay or refinance pre-existing loans or line of credits made by the eligible lender.
  • Your loan request to support ongoing operations is a result of the uncertainty of economic conditions as of the date of your application.
  • You are an entity or business domiciled in the United States with significant operations and employees located in the United States.
  • You will attest that you meet the EBITDA leverage conditions in the loan program you are under
  • You are not a debtor in a bankruptcy proceeding.
  • You may not outsource or offshore jobs for the term of the loan and two years after completing repayment of the loan.

What restrictions are in place?

  • The borrower will not be permitted to pay dividends or other capital distribution on its common stock or purchase an equity security of the company or a parent company listed on a national securities exchange while the direct loan is outstanding, except to the extent required under a contractual obligation in effect as of the date of enactment.
  • The borrower must agree to certain defined compensation limits for all employees with compensation greater than $425,000 (including salary, stock, and bonuses. Severance pay or other benefits received upon termination shall not exceed twice the total compensation received by the officer of employee in calendar year 2019. 
  • Conflict of interest provisions are in place as defined

All restrictions above apply through the duration of the loan and for 12 months after the date on which the loan is no longer outstanding.

How will these loans be treated from a tax treatment perspective?

Loans will be treated as indebtedness for tax purposes.

Assistance and Guidance from Freed Maxick

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The Freed Maxick Covid-19 Resource Center has a wealth of information and guidance on a wide range of topics related to tax relief and benefits, regulatory relief and benefits, and business continuity in the era of Covid-19.

It is important to note that the Federal Reserve and the Treasury recognize the varying needs of Companies and is continuing to seek feedback from lenders, borrowers, and stakeholders to make sure the program is supporting Companies as best they can. As we get updated guidance we will continue to post information.

Click on the button to explore insights, observations and updates.

If you wish additional guidance, we are available to discuss your issues and concerns. Connect with us here or call Freed Maxick at 716.847.2651.

Please keep in mind that due to the quickly-changing nature of the COVID-19 pandemic, you should always discuss changes with your Freed Maxick advisor or legal counsel.

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