Fed’s program for loaning to Main Street off to slow start

Michael Haith, owner and CEO of a Denver-based restaurant chain called Teriyaki Madness, is in an unusual position for people like him: He’s making money through food delivery and pickup and wants to borrow funds so he can expand.

Yet so far, a Federal Reserve lending program set up specifically for small and medium-sized businesses like his hasn’t been much help. He can’t find a bank that’s participating in the program, and he isn’t clear on a lot of the details about how it works. For example, he isn’t sure how much he could borrow.

“We are trying to figure it out, and trying to find a bank that is working with the government on this,” Haith said. “The guidance is pretty convoluted, and the banks seem a little wary.”

Haith’s experience underscores banks’ surprising lack of interest in the Fed’s Main Street Lending program, as well as the challenges potential borrowers are having accessing the program. Fed officials say more than 200 banks have signed up to participate since the program began two weeks ago, but that’s a small slice of the nation’s roughly 5,000 lenders. None have made any loans yet.

The sluggish start is in sharp contrast to the reaction that greeted the Treasury Department’s small business lending efforts, known as the Paycheck Protection Program. That facility, launched in early April, set off a frenzied response from millions of desperate small companies seeking a loan. The first $350 billion in PPP funding ran out in just two weeks before being replenished. Congress agreed to forgive the loans if they were mostly spent paying workers.

The Fed has come under criticism from a congressional watchdog for quickly taking steps to ease the flow of credit for large corporations but doing little for smaller companies. The Fed this month began its first-ever purchases of corporate bonds issued by companies such as AT&T, Microsoft and Pfizer.

The delay in Main Street funding may arise during a Tuesday hearing before a House committee in which Fed Chair Jerome Powell and Treasury Secretary Steven Mnuchin are scheduled to testify.

Powell said in prepared remarks released Monday that the PPP has apparently met the immediate credit needs of many small businesses.

“In the months ahead, Main Street loans may prove a valuable resource for firms that were in sound financial condition prior to the pandemic,” Powell said.

The Fed’s Main Street Lending program is the central bank’s first attempt since the Great Depression to go beyond its typical financing for large banks and Wall Street firms and instead provide loans to businesses. Its goal is to help companies survive the pandemic by providing low-cost, five-year loans with no interest payments for the first year or principal payments for the first two years. Banks will make the loans, and the Fed will purchase 95% of the value, freeing up banks to do more lending.

Lauren Anderson, senior vice president at the Bank Policy Institute, a lobbying group for large banks such as Bank of America and JPMorgan, said some of the group’s members have signed on, mostly as preparation in case the economy worsens later his year and more troubled companies need help. So far, business aren’t clamoring for the loans.

“There’s not huge borrower demand,” she said. “I don’t think we’re going to see a mass run to the banks and a huge amount of loans being written at this point.”

Eric Rosengren, president of the Boston Fed, said in an interview that the PPP attracted more interest because it essentially provided cash, not loans.

“So it’s not surprising that a grant program is more popular than a lending program,” he said. “Everybody wants a grant.”

The Main Street program is also more complicated than the PPP, Rosengren said, “because bank loans are complicated financial instruments” that are tailored to a specific company’s needs.

Companies with up to 15,000 employees or $5 billion in revenue are eligible for Main Street. The loans can range from a minimum of $250,000 to a maximum of $300 million. The Fed has said it will purchase up to $600 billion in Main Street loans from banks. Treasury has provided $75 billion in taxpayer funds to absorb any losses.

Rosengren said that the program aims to help companies that were successful before the pandemic and that can be successful again as the economy recovers. A deeply troubled borrower with no cash and no likelihood of rebounding won’t qualify for a loan, he said.

The program may be targeting too narrow a group, analysts say. Many companies with a clear path to survival will likely be able to successfully borrow from banks anyway.

Two former Fed economists, Nellie Liang and William English, suggested in a paper for the Brookings Institution that to attract more interest, the Fed should lengthen the term of the loan beyond five years, offer a lower interest rate for more credit-worthy companies, and pay higher fees to banks as an incentive for them to offer the loans. Main Street loans currently have a rate slightly above 3%.

Liang said in an interview that many struggling small companies probably don’t want more debt. By extending the terms of the loans to seven or 10 years, and offering some borrowers a lower rate, the loans would take on more of the features of a grant or equity investment, Liang said.

Still, that may not be enough. “Even with the recommended changes, the program may have limited demand, since many businesses need equity, not more credit,” English and Liang wrote.

Haith, meanwhile, said the interest rate on a Main Street loan is much lower than he would typically expect to pay, even in a healthy economy.

But the loan would also work for him because his business is healthy and he is actually trying to expand. He’s finding landlords a lot more accommodating and a lot of empty restaurant properties available. But there probably aren’t many others in the same boat, he acknowledged.

“I don’t know a lot of companies playing offense at this point,” he said.