Growing uncertainty surrounding another round of fiscal aid in Washington has reignited concerns about the Main Street Lending Program and whether it can help small and midsize organizations find bridge financing as the COVID-19 crisis continues.
While more than half of the executives said that they simply did not need the money, others cited a variety of reasons for not applying for loans through the MSLP.
The program remains woefully undersubscribed. Through August 19, banks participating in the MSLP have originated $497 million in loans – a far cry from the $600 billion that was made available to struggling businesses when it was launched in June.
This stands in contrast to the Paycheck Protection Program, which handed out about $530 billion of the $660 billion available before it stopped accepting applications on August 8.
The reluctance of businesses to apply for MSLP loans was reflected in a survey of executives for the proprietary RSM Middle Market Business Index. While more than half of the executives said that they simply did not need the money, others cited a variety of reasons for not applying, from needing more information about the program to concerns about the structure of the loans.
Their responses suggested that with greater clarity and better information about the MSLP, along with targeted changes to the loan terms, the program could gain wider acceptance.
In a best-case scenario, additional aid would include support for those businesses hardest hit by the pandemic. That could allow businesses to obtain a second source of financing that had grant-like features (think Paycheck Protection Program, round two).
Yet such a focus on that aid would almost certainly still not be enough, leaving out those companies that have managed to weather the downturn so far but could be at risk in the event of a sustained economic slump.
There are signs of life in the program. The Federal Reserve recently reported an increase in demand for financing through the MSLP, which the Fed has supported by supported by nearly $400 million in purchases of MSLP loans from $95 million through August 5 to $472 million by August 19.
Still, the program has fallen far short of its potential. A little more than a quarter of the executives who responded to the survey, or 26%, said that they had applied for a loan through the MSLP. And even though the majority of those who had not applied said they did not need the funds, that view may not last.
The longer the pandemic continues without a fully reopened economy, the more likely that businesses will look to the Main Street Lending Program, just as many did with the Paycheck Protection Program.
It is during this wait-and-see period that lawmakers have an opportunity to make the necessary clarifications and implement calculated changes to the loans’ term structure. Not only would these changes be welcome, but they would also be applauded as a significant step in providing longer-term financing options to those businesses in need.
The RSM survey also rebutted criticisms that had been voiced about the Main Street Lending Program. While some critics have said that restrictions on compensation, distributions and stock repurchases are significant detractors to participating in the program, the MMBI survey results suggested otherwise. Those reasons were lower on the list of the reasons that executives cited for not participating, below their concerns about the loan terms and needing greater clarity and information.
In the end, Congress is facing a choice. As negotiations for the next round of aid continue to limp along, small and medium-size businesses that are the heartbeat of the real economy face an increasingly uncertain future. And that future may radically alter the view of businesses on Main Street.
(This article has been updated to reflect MSLP figures through August 19.)
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.