On today’s show we’re talking about the many impediments to getting stimulus money. One of the newest programs is the Main Street Lending Program. This program is designed to help medium sized businesses that have been impacted by the Covid-19 Pandemic.
When you look at any business, there is the basic financial score card consisting of the income statement and the balance sheet. That’s every bit as true today in a moment of crisis as it would be in more normal times.
Businesses that have experienced a massive drop in income as a result of the pandemic have taken a hit on the income statement. The income statement speaks only to income and expense.
The balance sheet captures the assets and liabilities. How much cash does the company have? How much does the company owe? What cash is expected to come in the near future? What fixed assets does the company own that have intrinsic value. All these items are shown on the balance sheet.
If you have an income statement problem, perhaps a drop in revenue or an increase in expenses, the best sustainable solution is also found on the income statement. You need to find a way to increase revenue or cut expenses.
All too often, the proposed solution to an income statement problem is to lend the company money. If the problem is truly a short term problem, then a short term loan might be a good solution. But simply taking on more debt may not be the right long term solution.
Under the Main Street program, banks will lend between $250,000 and $300 million to businesses that were creditworthy before the economic crisis began. A Fed facility will then buy a 95% stake in those loans, leaving originating banks with 5% of the credit risk.
Out of the 11,000 federally insured banks and credit unions, 260 lenders have completed the registration process, while another 174 are still signing up. There are not many lenders in the program.
The participation in the program has been very small so far. So I decided to take a closer look to see why the program might be having trouble getting off the ground.
I went through the lending criteria for the various main street programs. I have to tell you that the rules are incredibly complex and the documentation required to qualify for the loan is heavy weight to say the least. There are over 30 documentation deliverables that must accompany each loan application. The restrictions are immense.
In fact, it took me nearly an hour to fully come to terms with the lengthy list of restrictions. Virtually every sentence reads like another rule that would disqualify a wide category of borrowers.
Knowing how businesses operate, I can’t see many real business agreeing to the terms of these loans. Not because the terms are all that unsavory, but because they’re that difficult to meet.
I predict that we will see this major loan program go largely unused. The will be a large number of businesses that could use the money that can’t access it and will go into bankruptcy anyway.
There are government programs for specific big businesses and industries like the airline industry. There are unemployment benefits for workers that have lost their jobs. The PPP program was a small program that provided a small amount of lifeline stimulus, but not enough to really save a business.
The big question is the missing middle. Those tens of thousands of medium sized businesses that each employ hundreds or thousands of people. They’re the forgotten ones that will be left out in the cold.
As real estate investors, we’re making daily investment decisions based on what’s happening in the larger economy. If business failures are going to multiply despite government efforts to help, we real estate investors need to pay close attention. Our revenue comes from the combination of demand and ability to pay. Demand is irrelevant without the ability to pay.