Survival Uncertain
It’s a battle that smaller companies are decidedly losing.

Some 70% of bank senior loan officers surveyed by the Fed said they have tightened lending standards on loans for small commercial and industrial firms in the third quarter. That’s the highest proportion since late 2008. The trend also extends to mid-size and larger firms as well, though the latter enjoy unprecedented access to capital markets. About 54% said they increased premiums for small borrowers, the most in over a decade.

“Everyone is willing to lend to the biggest firms,” said Olivier Darmouni, a professor of finance at Columbia Business School. “But since the pandemic has not been tamed, creditors are now asking if the businesses will actually survive and they’ll get their money back. For smaller firms, there’s a lot more uncertainty of that.”

In a bid to encourage banks to extend credit to mid-size firms, the Fed introduced its $600 billion Main Street Lending Program in April, wherein those making eligible loans can sell 95% of them to the central bank. Despite efforts to broaden the program, it’s issued just $253 million in loans as of Aug. 10. That’s compounded criticism that it only works for a narrow set of companies, is too complex and doesn’t provide enough incentive to risk-averse lenders.

Boston Fed President Eric Rosengren said Wednesday that as borrowers and banks become more familiar with the program, it’s seeing a steady increase in participation, adding that it may become even more essential should the coming months bring a resurgence of the virus.

A spokesman for the Fed referred Bloomberg to Rosengren’s remarks when contacted for comment.

Still, the facility stands in contrast to the Paycheck Protection Program, run by the Small Business Administration and the Treasury, which dolled out more than 5.2 million loans totaling $525 billion before closing last week. The PPP facility, for its part, has gotten its own share of criticism, with some saying the smallest companies and those in disadvantaged areas have been shut out, while politically connected businesses and firms that aren’t struggling have gotten funding.

Making matters worse, direct lenders, which often provide financing to small and mid-size firms, have been retrenching for months as they tend to their own portfolios, while those sitting atop the most capital are increasingly targeting bigger deals.

Business development company Ares Capital Corp. said on a second quarter earnings call that the average Ebitda size of companies it finances has doubled versus the same period a year ago, and that it’s also charging more to lend. Apollo Global Management Inc. set up a new lending business last month focusing on loans of around $1 billion.

“There is little the Fed can do when there are liquidity issues outside the banking system,” Financial Insyghts’s Atwater said. “It has really highlighted the challenge in trying to provide credit to small businesses in a way that is prudent for the lender.”