The Federal Reserve is creating a lending facility to finance small-business loans through the Small Business Administration's (SBA) Paycheck Protection Program.
The Fed said it will specifically offer term financing to lenders that is backed by the SBA loans. The plan is intended to keep the flow of small-business loans moving.
The $2 trillion stimulus bill allocated $350 billion in loans fully backed by the government that are intended to help struggling small businesses keep employees on payroll and cover other costs such as rent during the coronavirus pandemic.
The Fed's announcement means the agency will purchase the small-business loans off lenders' balance sheets, freeing up more lending capacity and providing the cash needed to do that lending.
In essence, the Fed is acting in the same way as a government-sponsored entity that purchases mortgages off lenders' balance sheets so those lenders can then make more mortgages.
This will be particularly helpful for small lenders not used to seeing this type of demand. For instance, according to The Wall Street Journal, First Bank in Hamilton, New Jersey, has already had more than 500 requests for SBA loans -- about a hundred times its typical load for a year.
The Paycheck Protection Program launched Friday, and lenders were immediately hammered with applications from small businesses in need. According to the Journal, the SBA on Monday had processed 124,000 loans from over 2,300 lenders totaling about $36 billion.