The Fed is finally starting its lending program for small and medium-sized businesses
Posted June 15, 2020 11:46 a.m. EDT
CNN — Small and medium-sized businesses are finally getting some much-needed help from the Federal Reserve.
The Fed's highly anticipated Main Street Lending Program is launching more than two months after it was announced at the beginning of April. While the central bank won't lend to businesses themselves, it will encourage banks to lend to struggling companies by taking the majority of the potentially risky loans off their balance sheets.
The facility has long been talked about, but banks weren't able to register as lenders of the program's loans until Monday.
The new loan program supports small and medium-sized businesses that have fallen on hard times as a result of the Covid-19 pandemic. Only businesses that were in "sound financial condition" before the outbreak are eligible, though the Fed doesn't specify what exact metrics must be met.
Unlike the Paycheck Protection Program, these loans are not forgivable and don't have requirements such as rehiring employees. Instead, the Fed expects borrowers to make "commercially reasonable efforts to retain employees" given the economic environment.
Millions of jobs have vanished across America as businesses shut down during the pandemic lockdown. Even though a net positive of 2.5 million jobs were created in May -- the largest amount on record -- the country is still a far cry from its pre-pandemic employment levels.
Businesses that have already laid off workers will still be able to apply for the Fed's main street loans.
Companies have to apply for the loans with their banks, which can now register as main street lenders, the Federal Reserve Bank of Boston announced Monday. Banks are encouraged to make the new loans immediately, the Boston Fed said.
The loans will range from $250,000 to $300 million, structured as five-year loans with floating rates. Payments will be deferred at first, with no principal due for two years and no interest for one year.
The Fed decreased the minimum size of loans to make them more accessible to smaller businesses. In April, the Fed also extended the limits of the companies eligible for main street loans to businesses with up to 15,000 employees, or up to $5 billion in annual revenue.
The central bank will purchase 95% of each loan extended under the facility, including those made before June 10 if they were originated under the same terms. By doing that, the Fed takes risk off banks' balance sheets and allows them to make more loans.
The main street facility is the latest of the Fed's measures to support the economy through this crisis. Some investors believe that the monetary and fiscal backstop will help the economy recover enough to keep the stock market going.
Even though stocks are lower on Monday and sold off last week, they have climbed significantly higher over the past few months, even as America entered a recession.