WASHINGTON – Michael Haith, owner and general manager of a Denver-based restaurant chain called Teriyaki Madness, is in an unusual position for people like him: he makes money from food delivery and pickup and wishes borrow funds to be able to develop.
Yet, so far, a Federal Reserve loan program put in place specifically for small and medium-sized businesses like his has not been of much help. He cannot find a bank that participates in the program and he is not sure how it works. For example, he doesn’t know how much he could borrow.
“We’re trying to figure it out, and trying to find a bank that works with the government on it,” Haith said. “The advice is quite complicated and the banks seem a bit suspicious.”
Haith’s experience underscores banks’ surprising lack of interest in the Fed’s Main Street lending program, as well as the difficulties that potential borrowers face in 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 country’s roughly 5,000 lenders. None have yet made a loan.
The slow start is in stark contrast to the backlash that greeted the Treasury Department’s small business lending efforts, known as the Paycheck Protection Program. The facility, launched in early April, sparked a frantic backlash from millions of desperate small businesses looking for loans. The first $ 350 billion in program funding was used up in just two weeks before it was replenished. Congress agreed to cancel loans if they were primarily spent on paying workers.
The Fed’s Main Street Lending program is the central bank’s first attempt since the Great Depression to go beyond its usual funding for big banks and Wall Street companies and provide business loans instead. . Its goal is to help businesses survive the pandemic by providing low-cost five-year loans with no interest payments for the first year and no principal for the first two years. The banks will make the loans and the Fed will buy 95% of the value, which will allow the banks to make more loans.
Lauren Anderson, senior vice president of the Bank Policy Institute, a lobby group for big banks such as Bank of America and JPMorgan, said some members of the group have signed up, mainly to prepare in case the economy deteriorates. later in the year and would be more troubled. businesses need help. So far, companies are not asking for loans.
“There is not a huge demand from borrowers,” she said. “I don’t think we’re going to see a massive rush to the banks and a huge amount of loans taken out at this point.”
Eric Rosengren, chairman of the Boston Fed, said in an interview that the paycheck protection program is gaining more interest because it essentially provides money, not loans.
“So it’s no surprise that a grant program is more popular than a loan program,” he said. “Everyone wants a scholarship.”
The Main Street program is also more complicated than the Treasury Department program, Rosengren said, “because bank loans are complex financial instruments” that are tailored to the needs of a specific business.
Businesses with up to 15,000 employees or $ 5 billion in revenue are eligible for Main Street. Loans can range from a minimum of $ 250,000 to a maximum of $ 300 million. The Fed said it would buy up to $ 600 billion in Main Street loans from banks. The Treasury Department provided $ 75 billion in public funds to absorb the losses.
Rosengren said the Main Street program aims to help businesses that were successful before the pandemic and who may be successful again as the economy recovers. A deeply troubled borrower with no cash and no likelihood of a rebound will not qualify for a loan, he said.
Analysts say the program may be too small a group. Many businesses 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 Brookings Institution article that to attract more interest, the Fed should extend the term of the loan beyond five years, offer a rate of lower interest for more creditworthy companies and paying higher fees to banks to encourage them to offer loans. Main Street loans currently have a rate of just over 3%.
Liang said in an interview that many struggling small businesses probably don’t want more debt. By extending loan terms to seven or 10 years and offering some borrowers a lower rate, the loans would take on more of the characteristics of a grant or a capital investment, Liang said.
Yet that may not be enough. “Even with the recommended changes, the program may have limited demand, as many companies need equity, not more credit,” wrote English and Liang.