Small Businesses Will Get More Help from the Fed
Program Changes Alleviate Some Risk for Lenders
The Federal Reserve announced Monday it is broadening the terms of its “Main Street Lending Program,” an emergency program aimed at helping small and mid-sized businesses through coronavirus-related hardships. Small businesses usually access funds through traditional bank loans, but many financial institutions are being cautious about lending to businesses during these uncertain economic times.
The goal of the Fed’s program is to free up funds for banks to lend and to help make high-risk loans less of a financial hardship for them. The program will also allow the Fed to buy more loans of various sizes from banks. When the Fed last revamped the program in April, it made changes to regulations about which companies could borrow. This time, it is making more changes to the loan terms themselves.
Updated Loan Terms Give Small Businesses Additional Economic Relief
The changes to the Main Street Lending Program will allow businesses more time to pay back loans. Previously, they only had one year to begin repaying principal but now they will have two. The Fed also extended the loan repayment terms from four years to five years. Additionally, the program has made funds more accessible for small businesses by decreasing the minimum loan amount to $250,000 from $500,000, and increasing the maximum loan amount to $300 million. The Fed also announced that it is creating a lending program for nonprofits.
Behind the scenes, the Fed will also purchase a larger portion of loans made to “highly leveraged companies.” Investors are hopeful that helping cash-strapped businesses access more capital will aid a recovery in the United States by injecting more money into the economy.
Zooming out, small businesses account for 44% of US economic activity and create two-thirds of net new jobs. Both Wall Street and the Fed realize that “Main Street” needs to be taken care of, which is the goal of this program and the motivation behind updating these terms.
What to Watch in Today’s Fed Meeting
Outside of the Federal Reserve’s recent changes to the Main Street Lending Program, the Central Bank is also wrapping up its two-day meeting this afternoon. The committee could make changes to policies concerning how bonds are purchased in the future, now that markets have rebounded to some extent. This could include monthly targets for purchases instead of buying bonds “in the amounts needed to support the smooth functioning of markets for these securities.” The Fed may also provide more guidance about the necessary requirements for the Central Bank to raise short-term interest rates in the future.
Because the Fed decided not to send out its routine “Summary of Economic Projections” report last time, analysts expect the central bank will release predictions about the economy’s future today. If these projections include slower GDP growth, higher unemployment, and lower short-term interest rates, this would mean the Fed believes that the pandemic’s impact on the economy will be long-lasting. Both Wall Street and Main Street will be paying attention to how the Fed is thinking about the economy—and what that means heading into the second half of the year.
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