WASHINGTON — La Colombe, a Philadelphia-based purveyor of fancy coffee and canned draft lattes, has seen its business fall off sharply in 2020 as the coronavirus pandemic shuttered its cafes and closed the upscale restaurants that serve its brew. But the company has fallen through the cracks when it comes to government relief.

La Colombe didn’t think it qualified for the government’s forgivable small-business loan program given its size and canned coffee manufacturing business. It is too small to have ready access to the debt markets big companies use to raise funds — markets that are chugging along with the help of Federal Reserve backstops.

The company’s leaders thought that another Fed program, one intended to help midsize businesses by providing loans, would be their best shot at getting help. But when the central bank announced the details in early April, it was clear that La Colombe would not qualify. The company has too much debt relative to earnings to meet the Fed’s leverage restrictions.

“That just doesn’t make sense for companies like La Colombe, because we’re growing so quickly,” said Aren Platt, who leads special projects for the company.

The Fed’s Main Street loan program for medium businesses was destined to be a challenge. The central bank has never tried lending to midsize companies before, and it is difficult to help a very diverse group of businesses without putting taxpayer money at risk. The Fed, the Treasury Department and members of Congress have also at times appeared to be on different pages about what they want the program to achieve.

The central bank and the Treasury, which is providing money to cover any loans that go bad, spent months devising the program, negotiating over credit risk and vetting terms. Many officials within the Fed wanted to create a program that businesses would actually use, but some at Treasury saw the program as more of an absolute backstop for firms that were out of options. Treasury Secretary Steven Mnuchin has resisted taking on too much risk, saying at one point that he did not want to lose money on the programs as a base case.


What has emerged after three months, two overhauls and more than 2,000 comments filed with the Fed is a program that seems to be incapable of pleasing much of anyone.

First announced March 23, the Main Street program finally allowed banks to register as lenders in mid-June — but only about 450 of the nation’s thousands of eligible banks have registered so far. Banks have reported that many clients are not interested in using the program, the Fed chair, Jerome H. Powell, acknowledged to concerned lawmakers during testimony in late June.

Small-town bankers say some clients have gotten spooked by the substantial paperwork involved in using the program. Big companies often have more attractive options elsewhere in the market. Some, like La Colombe, have too much debt to apply. That problem is echoed across the comment letters by companies that were expanding their footprint pre-pandemic.

It will be hard to declare the program an outright failure even if few companies use it because the Fed and Treasury have set out limited — and often fuzzy — goals. Officials say that they want to give healthy companies an option for credit access if market conditions worsen but want to be responsible with the loans they make.

“Success would be that we have broad national coverage,” said Eric Rosengren, president of the Federal Reserve Bank of Boston, which is overseeing the effort. “This is for businesses that have a good business model, that were disrupted by the pandemic and that are going to be able to recover from that so that they will be able to pay off the loan.”

The program is intended to help a narrow set of companies, particularly given its strict terms, experts said.


The Fed takes on 95% of the risk, but banks have to retain 5% of any loan they underwrite through the Main Street program, a stipulation meant to discourage them from dumping bad debt on the Fed. Because they must have “skin in the game,” they are likely to avoid underwriting loans if the economy is in crisis and it looks like a big chunk of borrowers might default.

The program also comes with reporting requirements and other restrictions — including limitations on executive pay and capital distributions, like dividends, that Congress set out in the relief legislation. If the economy is muddling along and credit is basically available, some companies will find borrowing through the Main Street program unattractive because of the strings attached.

It’s a Goldilocks design: Firms won’t use it if credit conditions are healthy, and banks won’t use it if they are too unhealthy. It could help companies access credit if the situation is just right — for instance, if credit conditions tighten with a second virus wave in the fall, but banks and borrowers expect the economy to recover before long.

“There are some tough conditions that go with taking that money,” Bruce Winfield Van Saun, chief executive at Citizens Financial Group, said at a May 27 investor conference. “So I think many companies will seek other funding from banks or from asset-based lenders if they can achieve that.” He added that “if the situation stays tough or worsens, then I think you’ll see more companies avail themselves of Main Street lending.”

The program fully opened Monday, and Rosengren said banks had already offered loans for companies that had been hard-hit, like movie theaters. He declined to say how many and said he expected demand to ramp up over time. The Boston Fed disclosures show that hardly any of the biggest banks, other than Bank of America, are willing to publicly say that they will make loans to new customers through the program.

An analysis by Goldman Sachs economists found that there are potential borrowers for whom the program’s terms would be attractive given current financing conditions and to whom banks could profitably lend money — mostly smaller and riskier companies. But they expect little usage because of the program’s conditions. Larger risky companies might also find the facility attractive, but the program limits would likely shut them out.


Another incentive of the program — removing loans from bank balance sheets to make room for more loans — also seems like it isn’t a priority now, a J.P. Morgan economist, Michael Feroli, wrote in an research note. He pointed out that a separate Fed program that takes small-business loans from bank balance sheets saw fairly limited use, suggesting that banks are not widely worried about clearing up balance sheet space.

Lawmakers have repeatedly pushed policymakers to make the program more inclusive and widely available. But Mnuchin has been relatively cautious about taking on credit risk, occasionally describing the Main Street program as a backup option that could be successful without ever being used by providing certainty to the market that credit would remain available.

“In the perfect world we announced all these facilities, the markets work, and we don’t need to use them,” he said on CNBC in May. “But they’re there, and they’re going to be ready, and they’re going to serve as backstops.”

Criticism of the program’s terms has prompted multiple revisions by the Fed and the Treasury to make it more attractive to borrowers and lenders.

Banks can now make smaller loans of as little as $250,000, and borrowers can have up to five years to repay the loan.

Even so, Powell told lawmakers June 30 that banks were “not getting a ton of interest from borrowers,” adding that they expected demand to grow. “We continue to be open to playing with the formula and making adjustments going forward.”


Powell signaled that the minimum loan size could drop further, and Mnuchin said that the Treasury and the Fed were looking into asset-based lending — which could allow more indebted firms to borrow by using their shops and factories to secure the loans.

That is what La Colombe is pushing for, sometimes through its local lawmakers.

It is unclear how much tweaks around the edges will help even if the economy takes a turn for the worse and credit availability dries up. The Fed can only offer loans, not grants, so companies who use the program will exit with more debt to service.

“There are limits to how good the program can be, because it’s a loan,” said Nellie Liang, a former Fed official now at the Brookings Institution. Still, she said, policymakers “should err on the side of being generous, especially for smaller businesses,” adding: “If the program is too modest going in, the economy can get worse, more firms fail, and even more support would be needed.”