White House Searches for Ways to Help Small Businesses

The Obama administration is discussing ways to expand assistance to struggling small businesses, but there is some disagreement among top officials over the best approach, according to people familiar with the matter.

One idea floated by the Treasury would make more capital available to small businesses by having the government essentially underwrite loans used to fund their businesses. That idea was challenged by National Economic Council Chairman Lawrence Summers, who said such a move would expose the government and taxpayers to too much risk, these people said.

The Treasury and White House are considering other ideas, including using more money from the $700 billion financial-industry bailout to unlock credit for small business. That sector has been particularly hard hit by the financial crisis, because banks, worried about their own capital needs, have pulled credit lines and declined to make small-business loans. Unlike some other industries, small businesses look to banks for their primary source of funding.

"The economic team is very united in the understanding that we have to be constantly looking at creating a favorable job creation environment for small business in these very challenging economic times," said Gene Sperling, an adviser to Treasury Secretary Timothy Geithner. "The hard part is as always figuring out what will be most effective and most efficient."

The administration has already taken steps to aid small businesses, including committing $730 million in stimulus funds and devoting more money towards lending guarantees for Small Business Administration loans.

But a long-awaited $15 billion program to buy SBA-backed loans, funded by the Troubled Asset Relief Program, has struggled to get off the ground. The providers of SBA-backed loans initially resisted involvement over concerns about TARP-related executive-compensation restrictions and other rules they thought onerous. The program is expected to begin purchasing loans later this month.

The Treasury and the White House remain concerned about the health of the sector, which is credited with creating as much as 80% of new jobs, according to the SBA. At a time of rising unemployment, the administration is under pressure to create new jobs or at least prevent as many layoffs as possible.

The jobless rate, which hit 9.5% last month, has become a heated topic in recent days, with Republicans criticizing the Obama administration's $787 billion economic-stimulus plan as ineffective. With little political appetite for another stimulus, the administration is looking for other ways to bolster the economy.

Government officials say there are still many businesses that are struggling to fund their daily operations.

"We still have good businesses whose credit lines have been cut and need liquidity," said SBA Administrator Karen Mills. "We're engaged in discussions all the time about how to make sure there is capital for small businesses. I think there will be continuous discussions until we're out of this whole liquidity and bank crisis, because small businesses are going to be the engine that takes us out of this recession."

Mr. Geithner has tapped a small group to think about ways to aid that sector, people familiar with the matter said. Mr. Geithner is concerned about the risks that small businesses pose to the broader economy and wants to find a way to unlock credit.

Mr. Geithner hasn't settled on a particular approach, these people say, and had not signed off on the proposal that Mr. Summers challenged.