Restoring the flow of credit to entrepreneurs

At least it does to Michael McDonald, who is trying to open a coffee shop near UC Santa Barbara next month but just heard that his funding had evaporated for an equipment leasing deal. McDonald needs the espresso maker and other gear in place in two weeks so he can train the first employees for the Zizzo's Coffee franchise.

"If I don't get my funding, those are 15 or 20 people who are not going to have work," said the Goleta resident, recounting his third brush with the credit crisis.

McDonald was squeezed this year when his bank cut off the home equity credit line he was using to help fund his start-up. He had looked into a conventional business loan but found most banks weren't interested in new businesses, requiring at least two years of operations. And the cost of the money was too high, he said, despite his good credit.

McDonald is just the kind of borrower the federal government hopes to help by its announcement last week that it would make loans more plentiful for small-business owners.

The program, part of the $800-billion credit-loosening initiative unveiled Tuesday by Treasury Secretary Henry M. Paulson, covers certain loans backed by the Small Business Administration, as well as consumer borrowing such as credit cards, auto loans and student loans.

Paulson said $20 billion would be used as credit protection for as much as $200 billion in federal lending.

The program, which will launch around February, wouldn't lend money directly to small-business owners or consumers. Instead it would help cover loans the Federal Reserve Bank of New York could make to investors who buy securities backed by the consumer and small-business loans.

The Treasury Department offered few details but said the deal applied only to investors who held newly issued, Triple-A rated assets.

Loans guaranteed by the Small Business Administration have dropped sharply in the last year. Small-business operators have seen other cash sources dry up, including home-equity loans, conventional business loans and even credit cards.

One expert didn't dispute the need to unlock the secondary market for such loans but said it was unclear how, and whether, that would work.

"There is not enough detail on the program yet to really know how much impact it's going to have and whether it will result in freeing up more capital," said Kurt Chilcott, chief executive of CDC Small Business Finance Corp. in San Diego. His company makes SBA real estate loans and sells them on the secondary market.