Federal relief loans for small businesses just dried up. Here's what to do if you need $1 million dollars or more to stay afloat

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Federal relief loans for small businesses just dried up. Here's what to do if you need $1 million dollars or more to stay afloat

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All of the PPP loan funds have been committed, but new Fed-backed loans could help some businesses come back after the crisis.

  • Less than two weeks after launch, all of the $349 billion allocated to small businesses in the CARES Act has been committed.
  • Lending could now come to a grinding halt as banks won't have the guarantee of the US Treasury to back up more loans.
  • Business owners who still need financing greater than $1 million can take advantage of the Federal Reserve's Main Street Lending program, which will support additional loans from banks.
  • The Fed's program backs four-year loans with payments and interest deferred for the first year.
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Just 12 days after the launch of the Payroll Protection Program, all $350 billion in loans have been approved, exhausting the amount allocated under the CARES Act.

Unless Congress acts to provide new funding, the program could grind to a halt, since lenders no longer have the backing of the Treasury for guaranteeing further loans.

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But last week, the Federal Reserve announced a $600 billion Main Street Lending Program, which will support loans greater than $1 million for banks to continue lending beyond PPP.

While the Fed's program lacks the forgivability that makes the PPP loans so appealing, the terms offer a low-cost financing solution that could make a real difference for businesses that expect to make a strong recovery after the crisis.

Business Insider spoke with small business adviser Bob Prosen about what steps entrepreneurs should take if they plan to stay in business.

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Plan for multiple cash flow scenarios to know how much funding you'll need

It's generally a good idea to have a clear picture of your expected cash flows each quarter, but given the unprecedented levels of uncertainty surrounding so many business conditions, one forecast may not be enough.

A common corporate finance practice is to create cash flow forecasts showing what your cash situation would look like in at least three scenarios: best case, worst case, and expected case.

"I would have my plan of action included in whatever loan documentation I've put together to say this is my plan to repay," Prosen said. "I would spend a fair amount of time sorting that out."

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Having a plan for each scenario can help you make proactive decisions about the most viable path through the crisis, while laying out clear alternatives for what to do if things improve or get worse.

Cut costs deeper than you would like

Businesses have been tightening their belts for weeks, but some may have resisted making drastic cuts while there was still hope for support from the $2 trillion CARES Act.

Given the overwhelming demand, the slow arrival of funds, and the prospect of a slow economic recovery, it's now past time to cut or defer as many expenses as possible.

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The terms of the PPP loans require you to retain employees and wages to be eligible for loan forgiveness. Meanwhile, the Fed's guidance is expected to be a bit more flexible, requiring borrowers to "make reasonable efforts to maintain payroll and retain workers."

Layoffs and furloughs should be a last resort, but when it comes to making cuts, Prosen says, "cut deeper than what you would like, and hopefully you won't have to do it again."

Work with your bank to access Fed-backed Main Street loans

The Fed says that its Main Street Lending Program is intended to work in concert with the Payroll Protection Program, and in some ways it could be a better option for businesses that can afford to take on debt.

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The Main Street loans are part of a $2.3 trillion effort that the central bank announced last week, and will offer four-year loans with payments and interest deferred for the first year.

Unlike PPP loans, which are backed by the Treasury, the Fed will be using its balance sheet to hold up to 95 percent of each loan made using the facility. This enables banks to continue lending beyond what their individual balance sheets could legally sustain.

With a minimum loan size of $1 million, the program may be out of reach for the average borrower, but the size of the overall program makes it worth taking a closer look, and there are no penalties for prepayment.

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"The first thing that strikes me is learn from what just happened," Prosen said. "People that acted first and acted fast are doing better than the ones that waited, so if this program even sounds plausible for you, apply now."

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