The Small Business Administration will begin in July to guarantee loans that help auto dealers purchase inventory, officials said Thursday.

Officials hope a government guarantee for a large share of the loans will help spur banks to begin making them again. Observers said the program could be appealing to some SBA lenders because of the extra fees they will be allowed to charge for the loans.

The loans, known in the auto industry as floor-plan financing, were previously considered too risky for an SBA guarantee. As the financial crisis deepened, banks cut back on the floor-plan credit they would extend, and dealers found themselves cut off from nearly all sources of financing. This drought caused the Senate Small Business Committee to urge the SBA to consider guaranteeing the loans in the hope it would encourage banks to resume that category of lending.

Karen Mills, the head of the SBA, told dealers in Kokomo, Ind., Thursday that the SBA would offer floor-plan loan guarantees through its 7(a) program.

Auto, marine, RV, and manufactured housing dealers will be able to take out SBA-backed loans of $500,000 to $2 million to buy cars and equipment from manufacturers.

The loans would carry a 75% government guarantee — smaller than the 90% guarantee temporarily given most 7(a) loans through a provision of the stimulus package. Borrowers would have their SBA fees waived, however, as is done for all other 7(a) and 504 loans for the duration of the stimulus.

The program will run as a pilot test until Sept. 30, 2010, and the SBA said it would consider then whether to extend the loan-guarantee service. Banks that are approved SBA lenders can participate in the program. In some cases, banks will be able to charge more than they normally can for 7(a) loans, due to the extra work it takes to service a floor plan loan.

"That pricing differential may help this to work," said Tony Wilkinson, the president of the National Association of Government Guaranteed Lenders.

SBA lenders will be able to make floor plan loans with a maximum term of five years, and the banks will be expected to control the transfers of the car titles to the dealers, to protect against fraud and other risks.

"These are transactional loans. It's a different kind of financing," Wilkinson said. Rather than collecting a monthly payment, floor plan lenders are repaid when dealers sell the inventory.

It was unclear how many SBA lenders would begin making floor-plan loans. The process is cumbersome, and since the collateral is the inventory the dealers are buying, floor-plan lenders must carefully monitor all transactions.

"This should be attractive to the smaller community banks where one loan officer handles all their lending products, as opposed to a bank where floor plan lending is done in one division and SBA lending is done in another," Wilkinson said.

For some banks that already make SBA loans but do not now make floor-plan loans, however, this may be too much to take on.

"We're not in the conventional floor-plan business," said Craig Chance, the senior vice president for community relations at Columbia State Bank, a $3.1 billion-asset institution in Tacoma.

"Floor-plan financing, SBA guarantee or not, is a pretty labor-intensive process; you need to have several people out there doing [vehicle identification] number inspections. We're not set up do a heavy amount of that type of lending. I don't see us being a big participant in that."

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