By Reginald Tucker
With the most recent House-approved stimulus plan still hanging in limbo in the Senate, the Federal Reserve has announced plans to expand its Main Street Lending Program with an infusion of $600 billion to allow more small and medium-sized businesses to be able to receive support.
“Supporting small and mid-sized businesses so they are ready to reopen and rehire workers will help foster a broad-based economic recovery,” said Jerome Powell, Federal Reserve chairman, in a news release.
The Fed’s expansion of the Main Street Lending Program includes the following changes:
- Lowering the minimum loan size for certain loans to $250,000 from $500,000
- Increasing the maximum loan size for all facilities
- Increasing the term of each loan option to five years, from four years
- Extending the repayment period for all loans by delaying principal payments for two years, rather than one
- Raising the Reserve Bank’s participation to 95% for all loans
“I am confident the changes we are making will improve the ability of the Main Street Lending Program to support employment during this difficult period,” Powell added.
The Main Street Lending Program contains three different facilities: one for new borrowers; one for borrowers who might have existing debt but lower fiscal needs; and one for borrowers who have an existing loan or credit line with outsize fiscal needs. None of these facilities contain a minimum company size requirement for eligibility, so self-employed business owners and companies with fewer than 500 employees may apply. What’s more, business owners who have already received PPP loans may still apply.
According to Powell, the $600 billion in new loans will run directly through federally insured depository institutions such as banks, savings associations and credit unions. The Main Street Lending Program intends to purchase 95% of each eligible loan that is submitted to the program, provided that the required documentation is complete and the transactions are consistent with the relevant Main Street facility’s requirements. The Main Street Lending Program will also accept loans that were originated under the previously announced terms, if funded before June 10, 2020. Powell said he expects the Main Street program to be open for lender registration in the coming weeks.
Industry weighs in on lending program’s potential impact on flooring
Word of the Main Street loan program’s expansion received mixed reviews by flooring industry observers. Scott Humphrey, CEO of the World Floor Covering Association (WFCA), said he welcomed the news. “I am encouraged by the Fed (and the SBA) doing all they can to not only provide temporary essential funding, but to make sure that funding is accessible to small and mid-size businesses,” he told FCNews.
Others, including Jerry Levinson, owner of Carpets of Arizona—with two locations in Glendale and Chandler—believe it could be effective in the right situation. “This plan would work very well for those who choose to use it,” he said. “Getting an SBA loan is very difficult—I know, I’ve done it. As our economy continues to grow, now is a great time to take advantage of certain situations.”
For some retailers, the decision to borrow more money depends on the longer-term strategy and one’s comfort level with taking on more debt. “There are really two types of retailers out there—those who want to grow fast and will borrow other people’s money to go further faster, and those who want to grow more organically and slow,” Levinson explained. “They don’t like debt of any kind and are less willing to take on risks.”
Texas-based New Braunfels Flooring falls in the latter category. After waiting and watching how the last round of funding was distributed, Michelle Winters, co-owner, said she is not interested in applying for any new federally funded loans. “The requirements were confusing to other retailers who received the PPP loan, and we already have enough to keep up with,” she explained. “Instead, our focus is on developing the divisions of our business that did not slow down and capturing the retail consumers who are ready to buy flooring.”
While the majority of retailers interviewed for this story applaud the government’s efforts to provide a lifeline for small businesses, most said they are going to take a pass on this latest opportunity. Craig Phillips, president of Carpet Country and Barrington Carpet & Flooring Design, Twinsburg, Ohio, participated in the PPP loan program as a means to keep staff on payroll with many working from home during the height of the pandemic. At this point in time, however, he said he is not looking for any new loan opportunities.
“With Ohio being fully open since the beginning of May, we have seen a rebound in our business,” Phillips said. “While retail business is off from last year’s figures, it shows signs of improving on a daily basis. We consider ourselves very fortunate to qualify for 100% forgiveness on our PPP loan, which was obviously a big plus for us. That being said, there still may be opportunities for other dealers to take advantage of low-interest loan options to get through these challenging times.”
Steve Weisberg, president of Crest Flooring in Allentown, Pa., said he is also not looking to overextend himself at this time. “In lieu of having the 24-week extension of the PPP loan along with other more flexible requirements, I would not consider taking out another loan,” he said. “The PPP loan was more than helpful in allowing me to continue to pay my entire staff, even though we were completely shut down from the third week in March to the last week in May.”
Others, including Mike Foulk, owner of Foulk’s Flooring America, Meadville, Pa., say the loans could be beneficial to a business located in or close to a hot spot where people have been afraid to shop or have workers at their house. But unless there was a drastic downturn in business, Foulk said he would probably take a pass on the Main Street loan.
Ditto for Kevin Rose, president/owner, Carpetland USA & America’s Flooring Store, Rockford, Ill. “I believe this loan will be helpful to those who qualify and are in need of some excess funds to get them through these unprecedented times,” he said. “However, I will not be applying.”
Lawmakers cite reservations among small business community
In an Inc. magazine article published the day after the Fed made its announcement, several lawmakers voiced their concerns about the parameters and requirements of the Main Street loan program. Mike Crapo (R-Idaho) and Mark Warner (D-Va.) specifically questioned the terms and conditions of the loan program, which will be open to companies with as much as $5 billion in 2019 annual revenue or fewer than 15,000 employees that were in good financial standing before the crisis. They cited several restrictions—such as limitations on executive compensation and requiring that companies make “reasonable efforts” to retain their employees during the loan term—that could make this financing less palatable for some businesses.
Another concern among critics of the Main Street Lending Program is—unlike PPP loans—the money must be repaid. This despite the fact that the new loans come with low interest charges of about 3%. “As it’s currently structured, it’s not helpful,” Chuck Morton, partner and co-chair of the corporate group at Venable, a Washington, D.C.-based law firm that represents corporate clients, told Inc. magazine. “If businesses can get money someplace else under terms anywhere close to Libor plus 300 basis points without the restrictions on payments, they will take that money.”
Nonetheless, this expanded source of funding could provide an additional cushion for small businesses, especially as traditional lending sources tighten up. That’s according to experts such as Bill Phelan, general manager of PayNet, Equifax’s commercial lending and banking data provider. He cited the company’s bellwether Small Business Lending Index, which closely followed small-business lending activity. After hitting all-time highs in 2019, Phelan said the April 2020 Index fell 14.4 points to 107.4—that’s 32% below its year-ago level. “Depending on what you’re financing needs are, there is still some traditional lending going on,” Phelan noted. “Obviously, it has taken a big hit.”