The Main Street Rescue That Wasn’t (And Still Isn’t)

What happens if Main Street becomes less a proving ground for smaller businesses — born of, and serving, local communities — and more a collection of larger firms, well-capitalized, but already enjoying competitive advantages?

Millions of smaller businesses are grappling with the impacts of the pandemic. And despite what might be seen as the best of intentions, various government initiatives and credit spigots may not be enough to keep small business (end especially small business formations) afloat.

To that end, as evidenced by a number of statistics (and no shortage of commentary), the Main Street lending program — designed to, well, help Main Street — is falling short.

That sentiment was amplified earlier this month when Bharat Ramamurti, who is a member of the Congressional Oversight Commission, which oversees that lending, said “by any measure, the Main Street program has been a failure.”

In terms of numbers: the program debuted in March but became fully operational only as late as July, and to date, into August, has extended only $200 million — out of $600 billion authorized.

Broadly speaking, and as reported in The New York Times, this is but one program among several geared toward aiding the economy by shoring up the balances sheets and operations of smaller firms in the U.S. The Main Street lending program is focused on companies that cannot raise funds in the capital markets through issuing, say, bonds, or selling equity. They are also too large to get funding through programs solely focused on small business lending.

As a result, companies that are able to tap into the Main Street assistance program are in sort of a gray area: they’re reasonably healthy and have gained some critical mass — they’re  not nascent startups. The loans have to be at least $250,000 and can go all the way up to $35 million. In addition, companies utilizing the Main Street funding must have relatively high debt levels — defined, when loans and existing and available debt are added together, as being more than four times EBITDA, a rough measure of cash flow.

In terms of mechanics, banks make the loans, the Fed keeps most of it on its books (95 percent) — and so banks hold 5 percent. The question is what happens if loans go sour — which means, of course, that banks get dinged if they do.

As noted by several lawmakers in a letter to Federal Reserve Chairman Jerome H. Powell and Treasury Secretary Steven Mnuchin, “Many banks seem disinterested in the program because they either wish to retain more than 5 percent of a profitable loan or they have no interest in retaining any stake at all in an unprofitable loan.” They recommended lowering the minimum loan amount to below $250,000 because that threshold, they said, “is overly restrictive and prevents small business access.”

Federal Reserve Bank of Boston President Eric Rosengren, as quoted in the Times, said an additional $600 million was at least in some stage of the lending process, which implies some uptake, but again, far, far lower than the $600 billion in capacity.

The fact that the companies themselves must have fewer than 15,000 employees and less than $5 billion in top line also makes one wonder just how “Main Street” the program is, after all.

As noted in this space, as found in joint research efforts between Visa and PYMNTS, across 359 small and medium-sized businesses (SMBs) with less than $10 million in sales, 76 percent of merchants have been grappling with at least occasional cash flow issues in the midst of the pandemic. About 49 percent experience those issues “sometimes” or “frequently.”

Roughly 37 percent of SMB owners are tapping into their personal funds and 26 percent are using personal credit cards, which indicates that there’s a gap that could be filled by other credit sources. It also indicates that rising debt levels might effectively shut those companies out from looking for Main Street lending.

The Times notes that thus far, the Main Street lending activity has seen a range of firms (those that apply, anyway) get funding. The smallest loan, at $1.5 million, went to a Florida real estate firm; the largest, at $50 million, went to a firm tied to Mount Airy, the casino based in Pennsylvania.

As Rosengren remarked earlier this month, “This program is designed for a business that had a disruption in short-term credit, that was in good shape prior to the crisis and who, after the pandemic subsides, would be able to be a viable business.”

Deterioration in “good shape” can come swiftly, as noted by the PYMNTS/Visa research — and smaller firms may fall by the wayside. As noted by the Chicago Tribune, Yelp has shown that as many as 80,000 firms have closed — permanently — as measured from March through July, dominated by companies with fewer than five locations (at 60,000 firms). We’ve estimated that Main Street represents about a third of employment and establishments across the U.S. — implying that the Main Street lending program might do well to cast its net a bit, well, wider.