August 28, 2020 - 52 views|
In the face of ongoing economic turmoil, here's how banks can help turn the Main Street Lending Program into a key life preserver for at-risk SMBs.
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.
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.
We recommend that banks participating in the Main Street Lending Program consider the following:
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.