By all accounts, the Federal Reserve’s Main Street Lending Program for small and medium-size businesses (SMB) has not been the type of rescue program many anticipated. Launched in April, the program did not make its first loan until July.
The Main Street program has suffered from comparison with the Paycheck Protection Program (PPP), even though – given the latter’s short-term focus – this is not an apples-to-apples comparison. The PPP has made more than 5.2 million loans, with $525 billion in loan proceeds distributed to SMBs, and was administered by more than 5,400 lenders.
By comparison, the Main Street program, which the Boston Federal Reserve oversees and has $600 billion in allocated funding, has made just $250 million (not billion) in loans, with $856 million in the pipeline as of August 12, with just 522 participating lenders.
The gaps between the two programs will only get worse, as new rounds of PPP funding for businesses that have been severely impacted by COVID are considered for the next rounds of PPP stimulus.
Our banking clients tell us they haven’t seen much interest in the Main Street program. Moreover, they note that they often offer traditional lending products to customers rather than the program. One client told us that small business and commercial banking customers have to be a little desperate to move forward with the program due to its restrictive and complex terms. These include high rates compared with other rescue programs and complex federal term sheets, as well as covenants that make the program difficult to understand for some business owners. The minimum loan amount requirement of $250,000 (which originally started at $1 million and then changed to $500,000 before settling at $250,000) has also been problematic for SMBs at the lower range of the annual revenue scale.
Rooting for the Underdog
As we know, Americans love a good comeback story. Program changes are rumored to be in the works that will make the Main Street program more attractive to and effective for SMBs. What’s more, the Main Street program may be a little ahead of its time for one important reason: as the economic impact caused by the pandemic continues to build, it can give at-risk SMBs a life preserver that is critical for the economic recovery.
The first round of the CARES Act stimulus plan (in the form of financial assistance for companies that maintain employee payrolls for up to eight to 24 weeks) has been very effective at helping both SMBs and individuals. However, there are signs of future economic distress as businesses have not been able to reopen or only reopen under reduced capacity requirements.
American Banker recently reported that large banks have $150 billion in deferred payments, which is one of many ominous signs that there is more pain to come in the form of loan delinquencies and defaults. This will only increase the need for longer term rescue programs like the Main Street Lending Program.
Re-energizing Main Street
We recommend that banks participating in the Main Street Lending Program consider the following:
- Use the Main Street lending guarantee as a proactive restructuring tool. Proactively use the Main Street program as a restructuring tool for existing clients showing signs of distress. The program requires that SMBs that were in sound financial condition prior to the onset of the COVID-19 pandemic “maintain their operations and payroll until conditions normalize.” The 95% participation/guarantee offers an option for mitigating the risks associated with extending repayment terms and reducing interest rates. Much like banks did before the pandemic with SBA guarantees for companies that did not have enough collateral to qualify for a traditional loan, they should seek ways to use the program that will benefit all parties. The program has provisions that state “eligible borrowers may continue to pay, and eligible lenders may request that eligible borrowers pay, interest or principal payments on outstanding debt on (or after) the payment due date, provided that the payment due date was scheduled prior to the date of origination of a Main Street loan.”
- Apply the proceeds toward permanent working capital. Cash flow is the number-one problem cited by SMBs. The PPP has been a solution for SMBs’ short-term cash-flow needs; the Main Street program can be a long-term solution. Cash-flow problems are caused by insufficient working capital, which is the lifeblood of all businesses. When I was a commercial lender and relationship manager for Bank of America, one of the most critical components of helping businesses of all sizes was to ensure that long-term needs were not addressed using short-term debt facilities. If we determined this was occurring, we would restructure the company’s debt by converting a portion – or all of its long-term working capital – into term loans, with payment terms that improved the overall debt structure. This not only relieved the pressure for business owners, but it also enabled the business to continue to grow.
The Main Street Lending Program includes terms that require no payment of principal or interest during the first year of the loan; moreover, there is no payment of principal required during the second year, which offers a critical tool for improving cash flow. Although the repayment terms include principal reductions of up to 70% in year five, this will allow time for SMBs to recover from the adverse impact of the pandemic and return to the “new normal.”
- Consider equity injections. Effective management of any business’s capital structure involves the right combination of debt and equity based on the industry segment. Many SMBs in particular do not have sufficient equity to survive normal economic downturns – not to mention a 100-year global pandemic. Banks can help customers identify options for equity injections that don’t require immediate repayments that drain critical cash flows. They can work with fintech accelerators like QC Fintech to help SMBs identify opportunities to work with equity investors.
When the spread of COVID-19 begins to ease, we should see some reversal of the fierce economic headwinds that SMBs are suffering through. At that point, we are confident this comeback story will end on a positive note.
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