The Federal Reserve said on Monday that it would help backstop a new government effort aimed at encouraging banks to lend to small businesses, moving in to support a new federal program that has gotten off to a rocky start.

Congress has dedicated $350 billion to make small business loans as part of the $2 trillion coronavirus support package it passed in March. The effort, known as the Paycheck Protection Program, is intended to encourage banks to lend to companies that agree to keep workers on the payroll. Most — and in some cases, all — of a loan would be forgiven if the borrower retained its workers and didn’t cut their wages. The government would repay lenders for the forgiven portions of the loans.

Companies with 500 or fewer employees can apply, on a first-come-first-serve basis, and banks will give them the short-term funding they need to keep workers on the books and cover expenses as coronavirus quarantines dramatically slow, or entirely stop, their cash flow.

But the first few days of the program, which began on Friday, have been fraught. President Trump said Monday that thousands of small businesses had applied for more than $40 billion in program loans, but that is just a fraction of the total sum available, and reports of trouble applying abound.

It is hard for the Small Business Administration to get so much money out the door quickly, and the model itself is posing a challenge for banks. Small-business loans could fill up their balance sheets, making it hard for them to keep lending to other customers. That is where the Fed’s new program would come in.

While the Fed has released scant detail on what form the initiative will take, it has promised to create a financing solution to help banks lend to smaller companies. It could either lend directly to banks making Paycheck Protection Program loans, or essentially buy the loans once they are originated so that banks will not have to carry them on their balance sheets. The Fed said in a statement that it would release more information this week.

The new Fed effort, which the central bank is rolling out under its emergency lending powers with signoff from Treasury Secretary Steven Mnuchin, addresses concerns raised by banks trying to participate in the program.

“I urge Treasury and the Federal Reserve to launch a secondary market facility to purchase program loans from originating institutions,” Rebeca Romero Rainey, president of Independent Community Bankers of America, wrote in a letter to Mr. Mnuchin and other government officials on Saturday.

“This program should not be limited by the balance sheet capacity of participating lenders,” she said.

But it deals with only one of the continuing concerns banks have raised.

“This is nice,” said Ernie Tedeschi, a policy economist at Evercore ISI, but “I don’t think it’s a game-changer.”

The largest banks were grappling with limitations imposed by the program’s structure and appeared days away from disbursing any money, even under the best circumstances.

Citigroup had not yet activated an online application portal it been promising its customers for days. JPMorgan Chase was offering customers a chance to submit some basic information to express their interest. A spokeswoman said the bank was preparing to roll out a more robust application form “soon.” Wells Fargo stopped taking new loan requests after announcing it had reached a $10 billion lending limit. Bank of America was taking detailed application information from customers and had loosened its eligibility requirements to allow customers without pre-existing loans to get access to the program after initially barring them, but it was not clear how far the bank had gotten in submitting those applications to the S.B.A. for approval.

And for banks of all sizes, the process of making the loans is time-consuming. Banks have to enter each borrower’s information into the S.B.A.’s online portal manually to seek approval from the administration for the loan. Borrowers have to provide detailed information about their businesses and financial histories, and there is no way for lenders to get around the paperwork by sending data in bulk.

But that’s just the beginning. Scott Salmon, a lawyer in New Jersey who has helped 75 small businesses try to tap into the program over the last week, said the lenders he talked to were in the dark about how the program worked until late last Thursday.

“They have no more information about how everything is supposed to be handled than everybody else,” Mr. Salmon said.

“I’m on a couple different email chains with bankers at different banks, and they’re passing on news articles and tweets.”

By Thursday afternoon, Mr. Salmon said, the S.B.A. had sent out just a handful of bullet points to banks on what to do. The banks themselves had to decide how much paperwork on the borrowers’ financial histories would be sufficient and what, specifically, they had to do to prove they had checked to verify the authenticity of each borrower. Smaller lenders, Mr. Salmon said, appeared to be more nimble in handling these decisions.

“It’s easier to figure out what your process is going to be when you have a couple decision makers versus being the largest bank in the world,” he said.

Dan Taylor of Holton, Mich., who owns two small movie theaters in the area, made inquiries to 12 banks for a loan under the program. His own bank, a local lender called Chemical Bank, took his application on Sunday but warned him that it did not know how long approval would take. That was after Mr. Taylor had spent days filling out initial requests for a loan, including some to online lenders like Kabbage and Ameris Bank. He said he had received no response to those inquiries.

Ameris Bank did not respond to a request for comment.

“We’re experiencing an extraordinary number of calls, and our customer service team is addressing them as quickly as possible,” said Paul Bernardini, a spokesman for Kabbage, in an email to The Times. He asked that his email address be given to Mr. Taylor so he could try to assist him himself.

In San Diego, Calif., Aaron Bearce, who with a partner owns Vitality Tap, a wellness cafe, described his attempts to apply for a loan through Chase, the bank his business normally uses. He waited past midnight on Thursday for an application page to appear on Chase’s home page. It never did. On Friday, he received a notice from the bank that its application page would be up by noon, but it wasn’t. Instead, the bank asked borrowers to fill out a simple online form with their names, tax identification information and contact information. Mr. Bearce completed the form, but said he has not heard anything since.

“We have hundreds of underwriters calling customers, but the numbers of applications is very high,” said Anne Pace, a Chase spokeswoman. “We have a new application process launching shortly.”

Alan Rappeport contributed reporting.

[Read More…]