Midsize Businesses Aren’t Getting the Help They Need

(Bloomberg Opinion) -- There is a big hole in the federal government’s response to this pandemic-driven economic crisis. Although Congress has delivered help to America’s smallest and biggest businesses, the key program intended to support midsize companies has failed. Congress must step back in and provide direct relief to these companies — which employ 48 million people and represent almost a third of U.S. private-sector gross domestic product — before more good businesses disappear and more workers lose their jobs.

As part of the CARES Act in March, Congress gave the Treasury Department half-a-trillion dollars to stabilize the economy. The Treasury pledged $75 billion of that to a Main Street Lending Program, administered by the Federal Reserve, which was supposed to support loans to companies with fewer than 15,000 employees or less than $5 billion in revenue last year. Congress also created the Paycheck Protection Program to help small businesses with fewer than 500 employees, but for businesses with between 500 and 15,000 employees — like regional chains and niche manufacturers — the Main Street program was the primary source of relief. The Fed agreed to buy 95% of any loan that a bank makes to these small and midsize companies as long as the loan had certain terms and the borrower meets certain criteria.

When the Fed announced its intent to create the program in April, it said the Treasury’s $75 billion investment would support up to $600 billion in loan purchases. More than four months later, the results are dismal. After first taking three months to set up the program, the Fed has since purchased just $472 million in loans. That’s 0.08% of the $600 billion the Fed had touted.

While all this money has been sitting on the sidelines, tens of thousands of businesses have permanently closed and millions of Americans have lost their jobs. Minority-owned businesses have been hit particularly hard: From February to June, the number of active Black business owners dropped by 19%, and the number of Hispanic and Asian business owners fell by 10%, in comparison to a smaller (but still alarming) drop of 5% for White business owners.

The Main Street Lending Program continues to perform anemically even though the Treasury and the Fed keep making changes to try to make it more appealing to companies — at the expense of workers and the public. The agencies dropped the program’s original requirement that borrowing companies make reasonable efforts to maintain payroll. They also eliminated a requirement that companies certify that they need a loan only because of the pandemic, and not because of pre-existing financial problems. And yet, business interest in the program remains minimal.

The fundamental issue with the Main Street program is that it’s trying to solve a problem that doesn’t exist: It only offers loans at a time when most struggling small and midsize companies don’t want loans. A recent survey from the Fed shows that demand for loans from businesses of all sizes declined in the second quarter. A recent survey of smaller businesses found that only 3% reported unmet borrowing needs. With so much uncertainty about when revenue will pick up again — if ever — most struggling businesses just aren’t looking to take on more debt.

The Treasury and the Fed can’t fix this problem by continuing to fiddle with the details of the Main Street program. Many of the changes under consideration — further reducing the risk banks would bear on such loans, permitting lending against hard-to-value assets, weakening affiliation rules that prevent deep-pocketed owners from benefiting from the program — are likely to help financial firms and not workers or the public. Implementing these changes will waste precious time.

Instead of trying to fix a program that is incapable of addressing the needs of most midsize companies, Congress should use the money that’s been slated for the Main Street Lending Program as a down payment to provide direct relief to these businesses and — most importantly — the people that work for them. There are already good proposals in Congress that would do this. The HEROES Act that passed the House of Representatives in May expands a tax credit that covers part of the cost of wages for midsize and other businesses. A broad group of Democrats has introduced a similar proposal in the Senate. These plans offer relief to companies in the form of grants, not loans, but also ensure that the money goes to support paychecks for workers.

America’s midsize businesses are getting hammered in this crisis but to date the government has not offered them the relief it has offered to their smaller and larger competitors. The Fed claims that business interest in the Main Street program will pick up if the pandemic and the economy worsen, but our goal should be to stop things from getting worse in the first place. Rather than building on the shaky foundation of the Main Street program, Congress should move on to approaches that could actually work.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Bharat Ramamurti is a member of the Congressional Oversight Commission for the CARES Act.

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