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One of the federal government’s main economic responses to the coronavirus pandemic is the $2.2 trillion CARES Act, which provides assistance for both small businesses and larger ones. For businesses with fewer than 500 employees the act offers forgivable loans, administered by the Small Business Administration (SBA), like the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan Assistance Program. For companies with 500 or more employees, which are too big to receive SBA assistance, the act provides non-forgivable loans. The money is designated for use in four ways: loans for airlines and national security assets; Federal Reserve loans; loans for mid-sized businesses; and the Main Street Lending Program. Here is a brief description of these initiatives.

Airlines and National Security Assets

The act sets aside $46 billion for direct loans and loan guarantees to passenger and cargo airlines, related aviation services and businesses critical to national security. The money is also available to lend to ticket agencies and businesses certified by the Federal Aviation Administration.

The loans come with strings attached, one of which is a limit on the amount of compensation that may be paid to highly compensated officers and employees. There’s also a ban on stock buybacks, as well as limits pertaining to dividends, employee retention and domestic employment. Further, there is protection for the government’s financial exposure because the Treasury secretary may not issue a loan or loan guarantee unless it obtains warrants, senior debt or equity in eligible businesses getting loans.

Federal Reserve Loans

The act provides $454 billion to support Fed lending to eligible businesses, states or municipalities. Recipients of loans must agree to the following conditions, which the Treasury secretary has the discretion to waive.

  • Refrain from stock buybacks for one year after the loan is paid off, except as required by any contractual obligations in effect as of March 27, 2020
  • Pay no dividends or other capital distributions for one year after the loan is paid off
  • Officers or employees earning more than $425,000 in 2019 may not receive a raise or severance benefits totaling more than twice their 2019 compensation, and officers or employees earning more than $3 million in 2019 may not earn more than $3 million plus half the amount of their compensation in excess of $3 million. These limits will be effective from the date of the loan until one year after the loan is paid off.

Help for Mid-Sized Businesses

The act creates a direct loan program targeted specifically at eligible businesses and nonprofit organizations with 500 to 10,000 employees, which the government deems as mid-sized companies.

There are a number of conditions attached to these loans, one of which is that recipients of these loans must agree not to outsource or offshore jobs for the term of the loan and two years after completing repayment of the loan. Recipients must also agree that until Sept. 30, 2020, the loan will be used to retain at least 90 percent of the borrower’s workforce at full compensation and benefits. The borrower must additionally certify to restore all worker compensation and benefits within four months of expiration of the current public health emergency.

Further, borrowers must agree not to pay stock dividends or purchase stock buybacks while the direct loan is outstanding, except if required under a contractual obligation in effect as of March 27, 2020. They may not outsource or offshore jobs for the loan duration and for two years after completing loan repayment. Collective bargaining agreements may not be abrogated for the loan duration and for two years after completing loan repayment, and will remain neutral in any union-organizing effort for the loan duration.

Main Street Lending Program

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The Main Street Lending Program is available to both small and mid-sized businesses, although it’s primarily designed to help companies that were too big for the PPP. It provides the Fed with $600 billion to purchase loans made by private lenders. The Fed will buy up 95% of a Main Street loan from the lending bank, leaving just 5% with the bank that originated the loan.

Loans may be made to businesses that meet these criteria:

  • Have no more than 15,000 employees, or has less than $5 billion in 2019 revenues
  • Are headquartered and primarily operate in the U.S.
  • Are not majority owned by foreign business entities
  • Were in operation before March 13, 2020
  • Require a loan due to circumstances caused by the pandemic

Small businesses that have already received forgivable PPP loans can also apply for Main Street loans. Again, however, the Main Street loans, unlike PPP loans, cannot be forgiven.

There are three categories of Main Street loans: New Loans, Priority Loans and Expanded Loans. New and Priority Loans are for a minimum of $500,000 and no more than $25 million. Expanded Loans are for larger amounts, from $10 million to $200 million.

Main Street Lending Program Loan Types
Loan Type New Loans Priority Loans Expanded Loans
Minimum Loan $500,000 $500,000 $10 million
Maximum Loan Lesser of $25 million or an amount that, when added to outstanding and unused available debt, does not exceed 4x adjusted 2019 EBITDA Lesser of $25 million or an amount that, when added to outstanding and unused available debt, does not exceed 6x adjusted 2019 EBITDA Lesser of $200 million, 35% of existing outstanding and unused available debt or an amount that, when added to outstanding and unused available debt, does not exceed 6x adjusted 2019 EBITDA
Rate LIBOR, plus 3% LIBOR, plus 3% LIBOR, plus 3%
Payments – Year 1: automatic deferral
– Years 2-4: 33.33% annually
– Year 1: automatic deferral
– Year 2-3: 15% annually
– Year 4: 70%
– Year 1: automatic deferral
– Year 2-3: 15% annually
– Year 4: 70%

Borrowers will have four years to pay off Main Street loans. They don’t have to make payments for the first year. There are no penalties for paying off the loans early.

New and Priority borrowers will pay back one-third of the principal in each of three years, starting the second year. Expanded Loan borrowers will pay back 15% in the second and third years. Then they will make a balloon payment of 70% at the end of the fourth year.

The adjustable interest rate for all three types of loans will be 0.3 percentage points more than the London Inter-bank Offered Rate. Lenders can charge borrowers 1% origination fees as well.

Main Street Loan Rules and Limits

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A business in need of a loan should apply through its local lender. Lenders can also use this program to add on to existing loans for clients. Eligible lenders include U.S.-insured depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies.

There’s no requirement under Main Street that borrowers avoid laying off or furloughing employees. However, borrowers are expected to make reasonable efforts to retain employees during the term of the loan.

Main Street borrowers have to certify that they expect to be able to make payments for at least 90 days and have no plans to seek bankruptcy protection. They are not allowed to use the loan proceeds to buy back their own shares, or pay dividends to common stock owners.

There are also limits on how much highly paid executives can benefit. Specifically, officers and employees who were paid more than $425,000 in 2019 can’t get a raise to a higher compensation level until the loan is paid off.

And executives who got more than $3 million in 2019 can’t get more than $3 million plus 50% of the excess over $3 million. Compensation includes salary, bonus, stock grants and other financial benefits.

The Bottom Line

Mid-sized and large-sized businesses have yet to receive nearly as much financial assistance as small businesses have gotten from the federal stimulus legislation. Soon, however, those with up to 15,000 employees and $5 billion in revenues will be able to take out four-year loans for up to $200 million under the provisions of the CARES Act.

Tips on Business Taxes

  • Consider working with a financial advisor experienced in business tax issues. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • The CARES Act offers tax credits and other business tax changes that owners of businesses, whether small or large, should be aware of as they respond to the challenges of the pandemic.

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Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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