The Federal Reserve is planning to launch its emergency lending program for small and medium-size businesses soon, and even more businesses will be able to qualify than originally planned.
On Thursday, the Fed said that businesses with up to 15,000 employees and $5 billion in annual revenue can apply, a much higher threshold than the initially announced caps of 10,000 employees and $2.5 billion in revenue. Lobbyists and some lawmakers had urged the Fed to open the loans up to more companies, especially distressed oil and gas firms.
Companies should soon be able to go to their banks to obtain one of these loans, but the program is not up and running yet. Fed Chair Jerome Powell said Wednesday he expected the “Main Street Lending Program” to be operational “fairly quickly.”
“These are not grants. These are loans,” Powell emphasized Wednesday.
Most small businesses with less than 500 employees have been encouraged to seek a Small Business Administration loan, known as the Paycheck Protection Program, because that can be forgiven if a small businesses uses most of the money to rehire and pay employees.
The Fed’s program is designed to target midsize companies and businesses that need money for more than just payroll expenses. The minimum loan size is $500,000, and companies will have up to four years to pay the money back. Most of the loans are capped at $25 million, but the Fed created an additional option to obtain a loan of up to $200 million.
The interest rate on the loans will be about 3.4%, as it is set three percentage points above the LIBOR, a global benchmark interest rate. By contrast, the Small Business Administration’s PPP loans were set at a much lower interest rate of 1%.
The loans will be available to a broad range of businesses, though there is not currently an option for nonprofits to apply for the Main Street loans. The Fed said it is looking into what it can do for these organizations.
Lawmakers, especially from states with struggling oil and energy companies, have urged the Fed to expand the Main Street program to include larger firms and businesses that already have a lot of debt. On Thursday, the Fed announced that companies can apply for a special “expanded loan” of up to six times the company’s worth. But there’s a catch: The bank approving the loan has to hold on to at least 15% of it, a higher threshold that puts more onus on banks to evaluate if a customer should get the riskier loan.
The Fed stressed Thursday that it is making these loans to “small and medium-sized businesses that were in sound financial condition before the pandemic.”
But some argue the Fed is now extending a lifeline to oil and gas companies that borrowed too much money long before the pandemic hit and did not have a sustainable business model.