If small businesses are the "heart of the American economy," as President Barack Obama said in March, then several state and city development authorities are acting as defibrillators by giving them a jolt of much-needed working capital.

With many of the nation's banks tightening credit standards, several states - including New Jersey, Connecticut, Ohio and Illinois - and a number of cities are establishing new financing programs or improving old ones, all in an effort to keep credit flowing to small businesses. Whether the agencies are enhancing loan guarantee programs or directly participating in loan deals, the intent is the same: to encourage banks to make loans that, in the current economy, they otherwise might not consider.

The city of Minneapolis, for example, raised its loan guarantee from 33 percent to 80 percent on loans of $50,000 or less and to 50 percent on loans between $50,000 and $75,000. It did this, says Bob Lind, director of business development at the Community Planning and Economic Development Department, because "we were hearing that companies that had long-standing lines of credit [with banks] were being told that the lines would be cut back or that they would be dropped. We just didn't want that to happen."

While the size of the city and state programs pale in comparison to the many billions of dollars the federal government has earmarked for small-business lending, the programs have been effective in their own right, economic development officials say. In Minneapolis, Lind says the enhanced loan-guarantee program has generated more than 20 new loans. The Connecticut Development Authority has seen its loan requests triple since it established a $100 million loan fund in the fall, according to the agency's president, Marie O'Brien.

One banker grateful that New Jersey established its Main Street Business Assistance Program in late October is George Matteo, the chairman and chief executive at the $248 million-asset Cornerstone Bank in Moorestown. An Italian market and catering shop was looking for a loan of roughly $1.5 million, which exceeded Matteo's comfort level. Then one of the bank's lending officers, Sarah McMahon, noticed that the shop qualified for the Main Street program because it had been opened for at least two years in New Jersey and had a minimum credit score of 680. She contacted the New Jersey Economic Development Authority, which ultimately provided $211,000 of financing.

"The Main Street program helped the borrower bridge the shortfall gap and enabled us to do the deal," Matteo says. "Otherwise, we wouldn't have been able to do it."

The Cornerstone deal is the only one closed thus far, though five more applications are being considered. The New Jersey Economic Development Agency, which administers the program, expects activity to pick up in the months ahead as awareness grows, a spokesperson says. Caren Franzini, the New Jersey agency's CEO, says that, historically, the state's economic development efforts have been geared toward job creation, but that the focus of the Main Street initiative is job retention "and keeping New Jersey companies in business, in New Jersey. From a big picture point of view, our role is enabling banks to continue to do business with their customer."

John Patrick, the CEO at the $1 billion-asset Farmington Savings Bank, says the bank would not have been able to make a loan to a 100-year-old company in its market if the state hadn't kicked in $200,000 of financing. He says Farmington Savings has five other deals it is working on with the state on credits that total more than $5 million.

Elsewhere, the Ohio state Treasury relaunched its GrowNOW program early last year, which offers a three-percent interest rate reduction on loans to small businesses for up to two years, so long as the company is producing at least one job for every $50,000 it borrows. A state treasury spokesperson says that 118 Ohio banks are participating and that, to date, the program has created more than 6,500 jobs and helped the state retain nearly 10,000 more.

And in Illinois, the Treasury deposited $1 billion into state banks, thrifts and credit unions late last year to provide banks with the liquidity they'd need to increase their lending. Thus far, the funds have helped participating institutions originate $500 million of new loans.

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