WASHINGTON — Banks and potential borrowers have already voiced reservations about the Federal Reserve’s credit facility for small to midsize companies. But another concern may be how long it is taking the Fed to get the program off the ground.

Fed Chairman Jerome Powell said in a press conference April 29 that the central bank would “probably be continuing to work and expand” the Main Street Lending Program “for some time.”

The Fed has already sought to widen eligibility for borrowers to attract more interest, and experts say the agency could be trying to be thorough to avoid the problems plaguing the Paycheck Protection Program, another government effort to contain the economic effects of the coronavirus.

But many analysts worry the longer the Fed waits to launch the Main Street program, the harder it will be for participating banks to help struggling commercial clients recover.

“The fact that this has dragged on for so long has put a lot more companies at risk,” said Jeremy Swan, a managing principal at CohnReznick.

Yet some observers say the Fed’s delay is not surprising. Bankers’ skepticism immediately followed the April 9 announcement of the MSLP. The central bank may be working meticulously to address their concerns, while some said both bankers and the Fed want to sidestep the kind of reputational fallout that followed the PPP after high-profile borrowers returned loans they didn’t need.

The Main Street Lending Program is “just fundamentally different than anything the Fed has ever undertaken in its other emergency liquidity facilities” and likely requires more time to make sure all processes are in place, said Jeremy Newell, a partner in the financial services group at Covington & Burling.

Swan said part of the Fed’s challenge is refining the loan approval process to “make sure that the firms that need these dollars are getting access to the dollars.”

Among bankers’ concern about participating in the Main Street Lending Program is that lenders will have to retain some risk associated with each loan, in contrast to the PPP where banks effectively serve as intermediaries to deliver funds provided by the federal government.

Both programs received financial backing under the Coronavirus Aid, Relief and Economic Security Act. But the $600 billion Main Street Lending Program is quite different from the PPP, which is managed through the Small Business Administration. The latter extends loans to businesses, with fewer than 500 employees, which can be forgiven if a company uses 75% of the loan to maintain payroll.
The Main Street Lending Program is aimed at midsize manufacturing, retail and other companies. Businesseswith no more than 15,000 employees or $5 billion in annual revenue are eligible for loans of as much as $500,000.

Businesses that were in good financial condition before the COVID-19 outbreak could be eligible for loans through one of three component facilities of the program. The Fed will then buy either 95% or 85% of a loan to free up the bank’s balance sheet.

But firms might have to wait longer for it to be available.

“I would expect that it will take the Fed at least another few weeks to continue to build those procedures and fully operationalize the program before it gets to the point where it’s actually in a position to be able to begin to purchase the participation interests that are the key driver of this program,” said Newell.

Still, anxiety is building over the apparent delay. The MSLP is just one of five facilities that the Fed has publicized to deal with the coronavirus fallout that are yet to be operational.

“Overall, we remain disappointed at how long it is taking the Federal Reserve to open the various credit facilities that it already has unveiled to help otherwise solvent companies survive the COVID-19 crisis,” Jaret Seiberg, an analyst with Cowen Washington Research Group, said in a note. “We see no upside in this delay.”

Since the Main Street Lending Program was announced, some companies might have seen their businesses deteriorate to a point where they are riskier borrowers in the eyes of banks, said Swan.

Unlike with the Paycheck program, in which the SBA holds 100% of the risk of the loan, lenders in the Main Street Lending Program will retain either a 5% or 15% share of the loan.

Because banks participating in the Main Street Lending Program will be applying their own underwriting standards to the loans they originate through the program, they might be more selective and reject loans to borrowers they suspect could have difficulty bouncing back after the economy reopens.

“There certainly are companies that at the time that the program was announced that may have had access to loans and the banks would have approved those applications and lended to them that today may not,” Swan said.

Ian Benton, a senior analyst at Javelin, said the longer it takes to finalize the program, the more it will “reveal the longer-term issues that businesses might face as a result of the pandemic.”

“I think that that definitely is a risk of this taking longer to come out,” he said.

At the same time, policymakers do not want to rush, observers said. Getting banks to participate while also ensuring that borrowers are not taking on too much debt are both challenges with the MSLP, observers said. The government also may want to steer clear of the mishaps that emerged from the hasty rollout of the PPP.

“The Fed but also Treasury and Congress are wary of making mistakes and probably wary of rushing into it, because we’ve seen what’s happened with PPP where it just doesn’t seem like they can get it to a point where it’s satisfactory to most people,” said Ian Katz, an analyst with Capital Alpha Partners.

Although PPP and the Main Street Lending Program are different in substance, their origins as business lending programs created under the CARES Act and backed by taxpayer funds put them under the microscope, said Newell.

“Given the recent PPP experience, I suspect that many in the market would on balance prefer to see a more deliberative process, whereby the rules of the road are clearly defined and articulated at the outset, even if that means that it takes a little bit longer for the program to go live,” he said.

A particular worry, observers said, is the reputational risk that could arise from Fed-backed loans going to big, high-profile firms that may not need them as much as other businesses. Treasury, the SBA and participating lenders have faced significant flack over PPP loans that went to big names such as Shake Shack and the Los Angeles Lakers, many of which returned the loans.

“What they don’t want to do is look like the Fed is buying less-than-quality loans and losing taxpayer dollars by funding these larger businesses,” said Swan.

One thing the Fed doesn’t have to worry about is a lack of funding for the MSLP. Whereas the PPP quickly ran out of money, requiring Congress to pass a second round of funding, the Fed and Treasury can easily expand the breadth of the Main Street program on their own and won’t reach a point where “there’s no more money,” Powell said April 29.

But the central bank will undoubtedly face similar scrutiny since it plans to release details monthly about the participants in its lending facilities, including how much they borrow and their interest rates.

Still, as more time passes between the announcement of the program and its official launch, the financial position of prospective borrowers may be worsening.

“As you get more information, and that information is bleak, whether it’s information about the company or information about the economy, it certainly can make it more difficult to forge a deal,” said Katz.