Banks are showing a surprising lack of interest in the Federal Reserve’s Main Street Lending program, adding to challenges that potential business borrowers have expressed about the program.
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.
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 and fewer than participated in a federal Paycheck Protection Program that assisted businesses with maintaining their payroll and workforce during coronavirus pandemic shutdowns. None had made any loans as of the middle of last week.
“Customer interest in the program has been tepid at best,” said Blake Chatelain, chief executive officer for Red River Bank. “Our bank would be willing to participate if we had customers interested, and we are continuing to monitor the rollout of the program.”
Jude Melville, chief executive officer of B1 Bank, said he’s gotten “a lot of inquiries” from businesses. So far, the bank hasn’t done any loans using the Main Street Lending program.
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.
“It’s taken a little while longer to unfold,” Melville said. “We’re trying to figure out which clients it will be appropriate for.”
The program is designed for businesses that were strong in 2019 but currently struggling because of the pandemic and have every reason to believe they’ll do well in 2021 or 2022. “This is for businesses trying to get from point A to point C and are struggling at point B,” Melville said. Some of the companies that would be natural candidates include hotels and energy service firms.
The Main Street Lending loans are designed to be used as working capital to give companies liquidity to keep running despite taking a hit in revenue from the pandemic.
The fact that the program is a loan and not a grant like the Paycheck Protection Program has kept lenders from participating, Melville said.
But for B1, which is focused on businesses, the program is a good fit. “Our clients are on the upper size of small businesses,” Melville said. The key thing to remember is that it is a debt that businesses will have to pay back with interest.
For New Orleans-based Liberty Bank and Trust Co., the Main Street Lending Program is a potential gateway for doing business with larger companies. It is registering for the program this week.
“We’re looking at it as a way to grow and expand the reach of Liberty beyond the typical customer base that we’ve been exposed to,” said Todd McDonald, senior vice president at Liberty Bank. “A lot of loan volume that will likely be processed with this loan program would be with mid-level and large companies. Traditionally, it’s extremely hard to compete with large banks to win business like this and some large banks are opting out of the program.”
About two weeks ago, the bank received an inquiry from a business in California for a $25 million loan.
“Typically, we would have to say no, that loan is too big for us. However, since the Federal Reserve takes 95% of the loan while we hold 5%, then it makes it within our wheelhouse,” McDonald said. “We’re really excited about it.”
The large business was even interested in opening new customer bank accounts and transferring existing accounts to Liberty Bank.
The bank has already seen more than 1,500 new customer accounts opened in the past month due to a “tidal wave” of interest from customers looking to support Black-owned businesses. It is one of the largest Black-owned financial institutions in the country with more than $700 million in assets as of June 30.
Liberty Bank is active in nine states from Alabama to Texas, including Louisiana.
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 federal funding ran out in just two weeks before being replenished with another $310 billion. Congress agreed to forgive the loans if they were mostly spent paying workers.
Figures through June 20 show more than 70,500 businesses in Louisiana were approved for federal funds totaling more than $7.2 billion. Nationwide, there were more than 4.6 million loans approved totaling $515 billion at an average loan size of $110,000.
Fed Chairman Jerome Powell said in prepared remarks released Monday before a House committee hearing that the Paycheck Protection Program has apparently met the immediate credit needs of many small businesses. In fact, about $128 billion in that program had not been doled out last week as the application period expired, with the administration and lawmakers talking about using leftover funds toward another round of relief by the end of July, potentially targeting hard-hit businesses like restaurants.
“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.
Lauren Anderson, senior vice president at the Bank Policy Institute, a lobbying group for large banks, 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, businesses 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 that the Payment Protection Program 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.”
Rosengren said 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.
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