The Senate voted on Thursday to include a proposed $30 billion lending program in a package of aid for small businesses, as two Republicans joined with Democrats to support the amendment.

The vote was 60 to 39, with Senators George LeMieux of Florida and George V. Voinovich of Ohio, delivering crucial support despite harsh criticism of the proposal by some of their fellow Republicans who derided it as a “bailout” and a mini version of the Troubled Asset Relief Program, the huge government rescue of the financial system.

The Senate must still vote on the overall small business measure, which also includes more than $12 billion in various tax breaks and an expansion of several other government lending programs. Republican leaders are pressing to offer amendments to the bill and it is not yet clear if it will be approved.

Senator Mary L. Landrieu, Democrat of Louisiana and chairwoman of the small business committed, waged a fierce fight in support of the $30 billion lending program, which would be administered by the Treasury Department through local community banks.

“This is something that we want to do to help Main Street, to help small business,” Ms. Landrieu said in one of a series of floor speeches. “This isn’t about Wall Street. It’s not about bailouts. It’s not about troubled assets. It’s not TARP. It’s a small business lending fund, a strategic partnership with community banks.”

Procedural wrangling over the amendment and other issues delayed the Senate vote until after 10 p.m.

The $30 billion lending program was so controversial that on Wednesday, the majority leader, Harry Reid of Nevada, removed it from the base text of the small business bill and instead proposed it as a separate amendment, in hopes of keeping the legislation alive even if the amendment failed.

Supporters of the lending program said that it would help community banks increase lending to small businesses and that the banks would potentially be able to leverage the $30 billion into $300 billion in loans. The Treasury Department helped design the program.

Critics said the program would encourage banks to make risky loans. “I believe this is the same old song and dance, expand the reach of the heavy hand of government,” said Senator Richard C. Shelby of Alabama, the senior Republican on the banking committee. “Like TARP, this program does not lend money directly to small businesses; it would have the government take ownership interest in hundreds of banks.” He added, “This is TARP-2.”

But Mr. LeMieux, the Florida Republican, said that was not the case. “TARP went to the big banks who were failing at the end of 2008, a lot of whom were selling mortgage-backed securities and other exotic investments that they shouldn’t have been selling,” he said in a floor speech. “This has nothing to do with that. These are small banks. This is the banker you know down the street – the banker who’s at your rotary, who you see at church or synagogue. This is not some Goldman Sachs banker. This is the community banker who loans to the tailor, to the construction business, the folks that employ people in your hometown.”

WASHINGTON – Big companies are building up cash and are expected to report strong earnings starting this week. Not so for small businesses that can’t get loans — or hire freely until they do.

The gap helps explain why the economic rebound isn’t stronger and could even stall. Federal Reserve Chairman Ben Bernanke stepped up pressure Monday on banks to break the logjam and lend more to smaller firms, which employ at least half of American workers.

Small business owners are relying on personal credit cards or raiding retirement accounts to stay afloat, the Fed chairman said.

Bernanke and other regulators have urged banks for months to lend more to smaller companies. Lawmakers have complained that small businesses that want loans are having trouble getting them. Banks have countered by saying demand remains weak.

The Fed does have authority to create programs to increase lending, such as providing low-cost loans to banks. But economic conditions would probably have to weaken considerably before the Fed would propose such a move. One such program set up during the 2008 financial crisis was recently closed.

The Fed chief’s latest comments came as legislative efforts to spur small-business lending have languished, and as the recovery has lost momentum. Bernanke spoke at a Fed conference held to explore ways to loosen lending to small companies.

“Making credit accessible to sound small businesses is crucial to our economic recovery,” Bernanke said. “More must be done.”

Some small business leaders say they would hire more if only they had easier access to loans. One of them is Marilyn Landis of Basic Business Concepts Inc. of Pittsburgh, which compiles financial documents for other small businesses.

Landis says she would like to hire one or two more people for her 10-person firm and wants to expand into New England. Yet even though she says she’s never missed a payment, Landis says her line of credit was cut about 18 months ago.

She relies on credit cards to pay for everything from supplies to payrolls. Without additional credit, she says, “It is impossible to expand, and I can’t hire.”

Nearly one-third of small business borrowers report difficulty arranging credit, the National Federation of Independent Businesses says.

By contrast, big businesses, which start reporting their second-quarter earnings this week, have enjoyed easier access to loans and low interest rates.

Analysts expect companies in the Standard & Poor’s 500 to report a 42 percent jump in profit by one measure, S&P says. For the current quarter, which ends Sept. 30, they expect a 31 percent rise.

The big companies also benefit from something available to fairly few small businesses: plenty of cash.

In March, cash at S&P 500 companies hit a record $837 billion — about a year and a half’s worth of profits. And S&P senior analyst Howard Silverblatt says he expects cash to rise to a new record for the April-to-June quarter when figures are released later this summer.

Yet even as the economy has improved, lending to small businesses has declined. It’s dropped from around $710 billion in the second quarter 2008 to less than $670 billion in the first quarter of this year.

The Fed and other regulators have urged banks to step up lending to creditworthy small businesses. Despite the push, such lending is still tight.

The impact on the economy is severe because small businesses tend to drive job growth during recoveries. They employ roughly half of all Americans and account for about 60 percent of job creation, Bernanke said.

And newer small businesses — those less than two years old — are especially vital. Over the past 20 years, these startups accounted for roughly a quarter of all job creation, even though they employed less than 10 percent of the work force, he added.

The Obama administration in early May sent Congress a proposal to create a $30 billion program to unfreeze credit for small businesses. The fund would provide money to small and medium-sized banks to encourage them to lend to small businesses. The legislation has yet to pass the Senate.

Bernanke said it’s hard to tell whether the problem is banks refusing to lend to small businesses or a lack of demand from those companies. Each company faces different economic conditions and complex relationships with customers, suppliers and creditors, Bernanke said.

Some lenders say they have restored more traditional standards after a period of lax lending that contributed to the financial crisis.

Several big banks say they’re already lending more to small businesses. Bank of America lent $19.4 billion to small and medium-sized businesses in the first three months of 2010, an increase of nearly $3 billion from last year. JPMorgan Chase and Citigroup have pledged to lend more, too.

Combined, though, the dollar amounts are relatively tiny compared with how much banks would lend in a healthy economy, said Robert DeYoung, a finance professor at the University of Kansas.

“These numbers would be dwarfed by the increase in lending after the economy starts recovering, and the economy hasn’t really started to recover,” DeYoung said.

Banks will be able to increase lending significantly, DeYoung said, only after businesses feel confident enough to take on more debt. Prodding banks to lend before then raises the risk that they’ll make bad loans, he said.

“I wish I could conclude this wrap-up with a list of the three or four things we could do to immediately unlock small business lending,” Fed Governor Elizabeth Duke said at the conference. “But the problems are numerous and complex, and they will require creativity and persistence to solve.”

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BY JEFF NOLAND

 Despite bank bailouts from Washington, D.C., credit for small and mid-sized businesses remains extraordinarily tight. For many banks, the lending pipeline is simply too clogged with “non-bankable” loans to even consider relaxing their credit standards for new loans, even for their existing customers.

It is a situation that not only frustrates borrowers, but also creates a conundrum for local banks. On one hand, most banks simply are not in a position to make questionable loans to companies with tied-up capital, limited collateral or weak earnings. On the other hand, banks do not want to lose the opportunity to service – or continue to service – a company’s treasury, deposit accounts, lock box, sweeps and other day-to-day banking products.

How can a bank loan officer say “no” to a company’s lending needs and yet still preserve the relationship with the borrower? What can a company do to secure a credit facility for working capital when its current bank isn’t an option?  

The presence of a third-party, asset-based lender may provide the answer to both questions. With an asset-based lender, a non-bankable borrower often can secure necessary working capital its bank can’t provide. As a result, an asset-based lending source may help clear the way for a bank to instead service the customer with basic treasury services.

In a sense, an asset-based lending source can turn a bank’s “no” into a “yes.” 

Unlike a bank, an asset-based lender’s underwriting criteria focuses on a borrower’s collateral (hence the term, asset-based lenders), not on cash flow or profitability. 

Many asset-based lenders are unregulated, thus they operate with much greater flexibility than typical banks. Plus, asset-based lenders loan their own money. As a result, they closely monitor their borrowers and their assets on a daily or weekly basis. Businesses that understand this up front – before they meet with an asset-based lender – inevitably are more comfortable in the relationship.

Because asset-based lenders are transaction-oriented and not relationship-oriented, a bank is able to refer a borrower to an asset-based lender and still maintain the “lead” in the relationship with the borrower. In time, the challenges facing the business will be solved, leading a business to return to their bank for their future credit needs. In the meantime, the bank can service other segments of the borrower’s needs and hence maintain the borrower’s trust throughout the entire process. 

From the borrower’s perspective, a good asset-based lending partner should present the same benefits a typical bank presents to a borrower. Does the asset-based lender in question present immediate access to its decision makers? Does the asset-based lender understand the local marketplace?  Are its decisions made locally? Are there certain industries the asset-based lender focuses on? Are there some they exclude?   

Similarly, banks looking to forge a relationship with an asset-based lender should consider several factors as well.  

For example, can the bank loan offer be confident the asset-based lender will handle the situation in a trustworthy manner? Will the asset-based lender get its decision makers involved so the process doesn’t get bogged down in bureaucracy? Will they move quickly? Do they finance enough different kinds of assets to provide a complete solution to include real estate, accounts receivable, inventory and equipment? Are they a broker or do they make and keep the loans themselves? In other words, will the referring bank lose control of the relationship if someone else is really making the loan? Is the size of the transaction within their “sweet spot,” or is it too small or too big?

To be certain, these and other considerations should be addressed before a bank refers its borrowers to an asset-based lender.  

However, if an asset-based lending source can address the concerns of both the borrower and the referring loan officer, then there is a good chance of a win-win partnership that can turn that “no” into a bankable “yes.”

It was late October when President Obama first called for measures to stabilize struggling small businesses. Then, in his State of the Union address in January, he emphasized the role small business would play in healing the nation’s wounded economy. But it is only now, eight months after that speech, that Congress finally seems ready to act. And the House and Senate are so far apart that it is not clear that they will be able to agree on a bill that contains more than just a few of the president’s ideas.

In a series of speeches, Mr. Obama has outlined a three-point agenda for rejuvenating small business. First, he sought to increase the size of loans guaranteed by the Small Business Administration and to open S.B.A. loans normally used for new real estate projects to refinancing existing commercial mortgages. Second, because local community banks are responsible for much of the lending to small firms, he proposed using the Troubled Asset Relief Program to lend money to small banks that could in turn be reloaned to small businesses. And the president suggested further tax cuts and other incentives specifically aimed at the small companies.

 Congress did enact a tax incentive to encourage small-business investment and a tax credit for hiring workers, which was not restricted to small companies. But even though small business is notionally sacrosanct in Washington, finding consensus for the president’s broader agenda on Capitol Hill, even among members of his own party, has proved difficult. Representative Nydia Velázquez, chairwoman of the House Small Business Committee, did not endorse the president’s initial S.B.A. proposals, which would have raised loan limits on the S.B.A.’s most popular programs, to $4 million to $5.5 million, although she never explained why. In February, she openly criticized a second round of S.B.A. initiatives from the administration.

Meanwhile, community bankers reacted coolly to the idea of borrowing from TARP. “The unfortunate development in 2009 was that while both the administration and Congress wanted to put in place special TARP efforts to help small businesses, TARP became so badly stigmatized that it became impossible to get almost anyone to voluntarily participate,” said Gene Sperling, a counselor to Treasury Secretary Timothy F. Geithner who has been working on small-business issues.

An aide to a legislator involved in discussions about the lending fund acknowledged that the bailout was political poison. “The primary issue is, is the money going to come from TARP,” said the aide, who declined to be identified. “If not, does it look like TARP? Does it leave a TARP-like aftertaste? I don’t think anyone wants this to have a TARP-like aftertaste.”

As a result, Mr. Obama revised this proposal for the State of the Union address as a separate small-business lending fund. But this proposal, Mr. Sperling noted, requires Congress’s assent. “The reality is that it has just run up against an amazingly intense legislative calendar that has included not only extending vital economic recovery measures but two historic pieces of legislation — health care and financial reform — that are also critical for the economy.”

It took until early May to write the lending fund bill. The program would initially loan up to $30 billion to small banks at 5 percent interest, though banks that make additional small-business loans could have that rate drop to as low as 1 percent. Banks that do not make small-business loans would pay 7 percent. The administration also worked with legislators of both chambers to create a $2 billion program to finance state and local programs that help businesses get bank credit.

The House has moved first. In March, it passed a bill aimed at small companies with tax relief and passed a similar bill last week. It followed Thursday with a bill that included the president’s small-business lending fund and state assistance initiatives. But House leaders refused to allow amendments that would have added to the administration’s S.B.A. priorities. “Through this whole process,” said a senior Democratic aide in the House who declined to speak for attribution, “the administration worked very closely with the chairwoman of the House Small Business Committee. They came to an agreement, and that’s the bill that we’ve got. This is a product of consensus — everybody gave on this bill.”

The bill passed the House without a single Republican vote. Instead of stimulating the supply of credit, Republicans have argued for stimulating demand for credit by reducing the tax and regulatory burdens on small businesses.

Though Democrats tried to inoculate the lending fund with a legislative provision that specifically disassociates it from TARP, Republicans derided it as “TARP 3.0? and even tried to change the bill’s title to the “TARP Junior Act of 2010.” At the same time, Republicans professed concern that, as they wrote in a Financial Services Committee report, “banks could shun the program for fear of being stigmatized by its association with the TARP.”

Meanwhile, the Senate plans to unveil its own small-business bill in the next few days, according to Richard Carbo, a spokesman for the Small Business Committee. The legislation will comprise tax incentives and S.B.A. initiatives, he said, but senators have not decided whether to include the community bank and state lending programs. Senate leaders are worried the programs will not win bipartisan support, said Mr. Carbo and another Senate aide, who indicated these may have trouble winning over even moderate Democrats. Senator Mary Landrieu, chairwoman of the Small Business Committee, had not taken a position on the bill as of last week, said Mr. Carbo. But today, he said, “She is warming up to it.”

Her Republican counterpart on the committee, Senator Olympia Snowe of Maine, has had a major voice in shaping the Senate bill, in part because she is one of the few Republicans thought to be willing to support the legislation. The president’s proposals for raising S.B.A. loan limits closely followed Ms. Snowe’s own bills. However, her office repeatedly refused to say whether she would vote for a bill that also included a lending fund.

Bipartisanship will likely be hard to come by regardless of what the bill includes. In the House, Republicans opposed the tax bill that passed Tuesday, in part, they said, because its three very targeted tax increases on bigger businesses would more than offset the relief for small businesses. They also complained that the tax cuts didn’t go far enough.

“I think what the majority is laying out is kind of a happy life of low expectations,” said Representative Peter Roskam, a Republican from Illinois, during the debate over the bill. “This is so narrowly crafted and so de minimus and being proclaimed by the same folks that promised us great things in the stimulus that I think we can do better.”

“You say, ‘do better,’” retorted Sander Levin of Michigan, the chairman of the House Ways and Means Committee. “You won’t vote for anything.”

The bill passed 247 to 170. Only five Republicans supported it.

Should the Senate bill pass, it will have to be reconciled with the House’s legislation. If neither chamber prevails, Congress could wind up jettisoning both the S.B.A. proposals and the community bank and state lending programs, and passing only the tax incentives. These incentives could include making the gains on small-business stock acquired through next year tax-free, limiting penalties for violating tax shelter rules and increasing the deduction for start-up expenses to $20,000.

The administration is hopeful that it will get at least some of each part of its agenda, said Mr. Sperling: “There remains a solid commitment from the Congressional leadership to move a small-business jobs package that is broad and robust enough to at least include small-business tax relief, S.B.A. initiatives, and the president’s two small-business lending initiatives.”

Bankruptcy can be expensive, often too expensive. The cost of a Chapter 11 reorganization proceeding for a small company, one with $10 million in annual revenue for example, is nearly as much as a larger company with 10 times the amount of revenue. Many companies facing financial difficulties these days simply cannot afford a bankruptcy reorganization, and they end up liquidating – either in a Chapter 7 bankruptcy or by turning over the keys to the secured lender.

Due to the expense of Chapter 11, some bankruptcy professionals are dusting off an old tool which lost its decades-old popularity in the 1990s. That tool is a “composition.” A composition can extend the maturity date of debts (an “extension”) or reduce them (a “compromise”) or both (an “extension and compromise composition”). In the right circumstances, a composition can increase the chances of saving a business as a going concern and put more dollars in the pockets of creditors, mainly through significantly decreased expenses as compared to a Chapter 11 proceeding.

A composition is merely a written contract among a company and its creditors to modify the company’s debts. It can allow a company to overcome a particular financial or operational problem or survive a general economic downturn. A composition is one potential outcome of a “workout” between a company and its creditors. Another outcome is a bankruptcy filing, including a prepackaged or prenegotiated bankruptcy if creditors are cooperative or an involuntary one if creditors are antagonistic.

Since compositions are creatures of contract and governed by common law (judge-made decisional law), and not statutes like the Bankruptcy Code, they offer tremendous flexibility. A composition agreement can contain any creative provision that business people or their lawyers can dream up to solve a problem. Compositions do have limitations, however, because they often require agreement among the creditors. Without this, statutory tools of the Bankruptcy Code may be required to solve the problem (and bind all creditors).

A typical composition agreement contains provisions on the timing and amount of payments to creditors, the conditions under which the agreement becomes effective (usually a sign-on by a certain percentage of creditors – often 90 percent), defaults, creditor remedies upon default and limitations on payments to the company’s principals. More complex situations may call for payments to be made to an escrow agent, the establishment of reserves for disputed claims, oversight by an informal committee of creditors and the payment of counsel for such committee by the company. But by and large, even complex compositions are more streamlined and cost-effective than the simplest Chapter 11 bankruptcy cases.

Compositions have the best chance of working with middle market or smaller companies, which generally have simpler capital structures and a more limited creditor body (in amount and type). The chances of success improve the more that the company’s creditors know and trust management and desire to maintain the company as a customer. Many compositions were done when small domestic manufacturers, particularly in the textile industry, experienced problems from overseas competition or from U.S. competitors moving plants overseas to bring down labor costs. Their suppliers were willing to be flexible as their own customer base was dwindling.

Clearly, there are times when bankruptcy is the better option. For example, if a company needs to shed space by rejecting one of its real estate leases, under state law the landlord may have a daunting claim due to accelerated future rent. In bankruptcy, such termination damages are capped at a manageable level. A bankruptcy may also be needed if a “renegade” creditor is so far along in the legal process that he is demanding full or immediate payment to refrain from having the sheriff seize assets. Only the bankruptcy “automatic stay” will put the brakes on such a creditor.

Although compositions are still ideal for restructuring trade debt for middle-market manufacturing and service concerns, they can and should be more widely used. One was used recently by creditors of a real estate finance company whose business was to purchase mortgages, pool them and sell interests in them as securities. Bankruptcy was not an option due to relatively new aspects of the Bankruptcy Code exempting certain creditor actions in such securitizations from the automatic stay. As a result, a bankruptcy fling would have been chaotic. Instead, the parties were able to resolve the matter using a complex form of a composition agreement.

For middle market or larger companies, or simple or complex situations, a composition can be an effective, low-cost alternative to a Chapter 11 reorganization.

Slome is a member of Meyer, Suozzi, English & Klein. He works in the firm’s bankruptcy and business reorganization law practice.

The biggest Wall Street banks slashed their small business loan portfolios by 9% between 2008 and 2009, more than double the rate at which they cut their overall lending, according to a government report released Thursday.

The Congressional Oversight Panel report spotlights the role banks, especially the largest ones, played in the credit crunch that has plagued small companies throughout the recession.

“Big banks pulled back on everyone, but they pulled back harder on small businesses,” Elizabeth Warren, the panel’s chairwoman, said on a conference call with reporters ahead of the report’s release.

Warren’s oversight committee was established to keep tabs on the federal government’s financial stabilization effort, the Troubled Asset Relief Program (TARP). The committee’s May report focuses on the role TARP played in improving credit access for small companies.

The grim conclusion: It failed.

The biggest TARP program pumped billions in low-interest capital into banks, but did not require that banks lend that money back out. When it came to extending credit to small firms, most big banks took a knee.

In the seven months that the Treasury required the 22 biggest TARP recipients to report their small-business lending, the banks collectively cut their lending by 4.6%, reducing their outstanding balances by $12.5 billion.

The problem remains an urgent one. “Small business credit remains severely constricted,” the report’s authors concluded. “Unable to find credit, many small businesses have had to shut their doors, and some of the survivors are still struggling to find adequate financing.”

Mapping the problem: Just how bad is the small-business credit shortfall? It’s impossible to tell, thanks to lax data collection and regulatory reporting requirements.

The definition of “small business” varies widely — even the government’s Small Business Administration uses different measures for firms in different industries — and what banks consider a “small business loan” includes everything from traditional installment loans to credit lines and credit cards.

The Treasury briefly required the biggest TARP takers to report monthly on their small-business loans, which offered a good snapshot of lending trends through the second half of 2009. But banks were allowed to stop reporting those numbers once they paid back their TARP loans. That left Warren’s commission scrambling through piecemeal data sets.

The government needs to step up its data collection “so that in the future policymakers will not be forced to make decisions with too little information about what is actually happening,” the report says.

Warren called the data problem “enormously frustrating,” adding that it is “virtually impossible to get a clear assessment of these programs when you don’t have good data.”

Within the limited data available, a pattern is clear: Small companies can’t get the credit they need. Federal Reserve data shows “a precipitous drop in lending to small businesses in the last quarter of 2008, and conditions that remained tight throughout 2009,” the report notes.

Small banks still not lending

One bright spot in a bleak credit landscape has been SBA lending. Thanks in part to government incentives, the number of SBA-backed loans rebounded from last year’s lows and is approaching pre-recession levels. The agency’s flagship program backed almost 29,000 loans in the past six months, totaling $7.5 billion.

But SBA lending represents only a sliver percentage of the overall small business credit landscape: about 4%, Warren’s report estimates.

The Treasury is attempting to jumpstart other lenders with new plans to pump inexpensive capital into financial intuitions, especially small banks and community lenders.

Warren’s report criticizes many of the plans being discussed. Supply-side solutions may be doomed to failure, it suggests, because small banks have limited reach and megabanks simply won’t start lending again until it’s in their financial interests to do so.

But if the federal government does move forward with new lending incentives, Warren wants to see them tightly focused and tied to measurable goals.

“Our experience with TARP has shown that giving money to banks without strings attached does not produce the advertised result,” she said.

Fast-Moving Cases Put Pressure on Unsecured Investors to Act Aggressively

More and more overleveraged, recession-battered companies are ending up in bankruptcy owing their creditors much more than they are worth, which is forcing unsecured creditors to make brash legal maneuvers to squeeze out even a small recovery in Chapter 11 cases.

Unsecured creditors, including bondholders, are near the bottom of the creditor-repayment scheme in bankruptcy, a reality that is hard to handle when over-leveraged companies that borrowed heavily during the credit boom end up in bankruptcy worth far less than they owe. But unsecured creditors and their attorneys aren’t just standing on the sidelines; they are pulling out all the stops to scratch out a recovery.

“The nature of the Chapter 11 process has changed,” said Francis A. Monaco Jr., an attorney with Womble Carlyle Sandridge & Rice PLLC. “Secured lenders are under water and, on paper, there is nothing left for unsecured creditors.”

Now, bankruptcy lawyers say, unsecured creditors, particularly bondholders often owed in the nine figures, must move quickly to wrest a recovery from secured lenders when a company files for bankruptcy protection with an exit plan that wipes out its investment.

That is a marked change from a few years ago, when unsecured creditors committees, which represent bondholders, vendors and pension-plan participants, among others, were content to negotiate recovery scenarios while a company remained under court protection. When financing was easy to obtain, lenders were often paid off, and unsecured creditors divided up the reorganized company’s equity or reaped the proceeds of a sale.

Today, companies are frequently entering Chapter 11 after negotiating a restructuring plan with secured lenders, but without the input of junior creditors. Also, lenders are frequently agreeing to finance the company only long enough to complete a sale of its assets.

Fast-track sales often generate just enough proceeds to repay lenders.

Mr. Monaco, a creditors’ attorney, calls such sales “liquidating 11s” because the company files for Chapter 11 but has no intention of pursuing stand-alone reorganization. Such fast-moving cases “put incredible pressure on committees to make quick decisions,” he said. “You’re almost forced into making objections just to slow things down.”

Creditors will object to the company’s bankruptcy financing, sale procedures and outline of a Chapter 11 plan, all in an effort to gain leverage.

Sometimes, the protests work.

For instance, the company may relent and bring creditors into reorganization talks. Or, even better from the creditors’ point of view, the objections could delay the case long enough to give creditors more time to muster substitute financing.

“Committees can object all they want, but the greatest leverage is being willing and able to provide alternative financing,” said Matt J. Williams, a bankruptcy attorney at Gibson, Dunn & Crutcher LLP.

That financing typically comes from bondholders, including hedge funds and other debt investors that have financing sources not available to rank-and-file trade creditors, he said.

That type of exit financing recently came into play in the bankruptcy case of Cooper-Standard Holdings Inc.

When the auto-parts maker filed for Chapter 11 in August 2009, it appeared that senior bondholders would get “a kiss,” or token recovery, and secured lenders would take control of the company, said Thomas Moers Mayer, whose firm, Kramer Levin Naftalis & Frankel LLP, represents Cooper-Standard’s unsecured creditors.

After seven months and substantial negotiations, Cooper-Standard’s bankruptcy-exit plan calls for investors, including certain bondholders, to pump $355 million into the company. That investment will allow lenders and senior bondholders to be paid in full while subordinated bondholders will recover more than a quarter of what they are owed.

“If you can extend the length of a Chapter 11 case, you have substantially more leverage,” Mr. Mayer said.

The success of such tactics, however, has prompted struggling companies and their lenders to take steps to fend off challenges even before a Chapter 11 filing, said Jeff Marwil, a partner in Proskauer Rose LLP’s bankruptcy practice.

For example, companies know creditors will challenge a quick sale to the lenders, so a business will shop its assets before it files. That way, it can tell a judge that it has been on the market for months.

Companies may also include small equity or cash “gifts” for unsecured creditors in their Chapter 11 plans to persuade creditors to support their deal rather than fight and risk walking away with nothing, Mr. Marwil said.

Companies and lenders “understand the game and come to court with an agenda,” he said. “You think about what the committee will do…and be prepared to respond, or litigate in court.”

If creditors fail in squeezing gains out of the Chapter 11 plan, they must look elsewhere for recoveries.

Owners report loans are hard to obtain, curtailing employment

— Capital is the oxygen that a small business needs to survive and thrive, yet across the country, the air’s pretty thin, as business owners complain of huge hurdles to getting badly needed loans.

Jim Collins, co-owner with his wife, Arlene, of Quantum Energy Solutions, has been in business in California since 1974. He has a $50,000 line of credit, backed by the U.S. Small Business Administration, through US Bank, owned by US Bancorp. He has a solid credit history and $30,000 in untapped credit.

Yet when Collins approached the bank about borrowing at least $500,000 to expand his 12-employee firm — which retrofits buildings with energy-efficient technologies — he said he was rebuffed, told that his company lacks resources and collateral. US Bancorp declined to comment.

Collins, 70, can’t get the money he needs to hire five additional workers and ramp up marketing, even as the Obama administration promotes the “green jobs” of the future.

“The credit crunch is still there. It really impedes our ability to grow,” he said. “I’d put five more people to work tomorrow.”

Lending across the U.S. economy contracted 7.4 percent last year, the biggest such drop since 1942, according to the Federal Deposit Insurance Corp.

Corporations are issuing bonds again, and large companies have access to bank loans, but it’s still an uphill climb for the little guy.

“There’s a big gap in access to credit for small firms now, and it’s a huge problem,” said Karen Mills, the head of the Small Business Administration. “We have a sense that the banks are not back to lending the way that they need to be, going forward.”

Small businesses account for 65 percent of U.S. employment, so it’s a serious matter when lack of credit is squeezing the firms.

“If we’re going to come out of this recession and get people back working, it’s going to be because we give small businesses the support that they need,” said Mills, whose agency has guaranteed more than $22 billion in loans to small firms since early last year.

Blame for the situation doesn’t fall on banks alone. Large banks had $4.4 trillion in unused credit lines outstanding in 2009, as consumers and businesses shunned borrowing to pay down debt. A 32 percent increase in U.S. bankruptcy filings last year suggests that plenty of borrowers simply aren’t creditworthy. FDIC data show through December that lenders in three major banking cities — Chicago, Kansas City and San Francisco — had more than 5 percent of outstanding loans late 90 days or longer.

“Lenders aren’t saying, ‘We don’t want to lend.’ Lenders are saying, ‘We’d like to lend, but loan requests are down, and also the bank regulatory agencies are scrutinizing loans at a much higher level than they have been in the past,’” said James Ballentine, a senior vice president at the American Bankers Association.

“That, too, is understandable, because you want to make sure that all guidelines are being followed and the collateral is there, and that’s a problem for many businesses as well.”

Still, it’s clear that small companies face significant hurdles when approaching banks for loans or even trying to tap existing lines of credit.

“The anecdotal evidence certainly suggests there’s a credit crunch for small business. You can’t prove it, but it’s pretty hard to come down on the other side,” said Douglas Elliott, a former investment banker who is now a researcher at the Brookings Institution, a center-left policy research center.

– Small asset-based lenders are growing.

– Large banks are growing their asset-based lending businesses.

– What it takes to break into the asset-based lending game.

When the University of Alabama booked its trip to the college football national championship last month, Weezabi LLC went into a hurry-up offense.

The three-employee company — one of a select few licensed to make “Crimson Tide” merchandise — needed 60,000 t-shirts. Without the time to huddle investors, Weezabi pledged as collateral part of its future revenue to FTRANS, an Atlanta-based lender and credit analyst, and kept rolling.

“When they went 12-0 last year, we started to think ‘This could get pretty crazy,’” said co-founder and CEO Seth Chapman. “If it wasn’t for that loan, we would have missed the boat on all of this hot-market stuff.”

Asset-based lending, once considered a last-resort finance option, has become a popular choice for companies that don’t have the credit ratings, track record or the patience to pursue more traditional capital sources. It is also a providing another critical boost to the finance industry: jobs.

Because asset-based lenders focus on collateral, rather than credit-worthiness, they do deals that more traditional lenders shy away from. Borrowers put up equipment, inventory, accounts-receivable and other liquid assets in exchange for the money.

In 2008, asset-based lending, excluding mortgages, swelled by 8.3% to almost $600 billion, according to the Commercial Finance Association, an industry trade group. Last year, a period when syndicated lending sagged by 39%, according to Dealogic Inc., asset-based lenders were on track to dole out almost $761 billion, or 30% more money than they did in 2008.

“We’re no longer viewed as the lender-of-last-resort let’s put it that way,” said Michael Sharkey, president of Cole Taylor Business Capital, a Chicago-area asset-based lender. “And we should really be viewed as the fireman of this crisis, because we took risks that a lot of companies won’t take.”

Mainstream on Main Street
The asset-based finance industry is still dominated by Wall Street’s biggest firms and almost all of those companies pulled back during the crisis. From 2007 to 2008, almost half of asset-based loan volume from the industry’s top 25 firms disappeared.

However, those companies are quickly getting back in the game. They funded 23% more deals in 2009. Wells Fargo, which had acquired Wachovia — another big asset-based lender — in 2008, shot to the No. 2 spot on the asset-based lending league table, lending 23% more than both companies combined had doled out in 2008. In December, Wells Fargo had $27 billion in outstanding asset-based loans and about 1,700 workers financing such deals.

What’s more, these firms are hiring, adding to the estimated 35,000 people who currently work in the sector.

Bank of America, the industry leader that has a lock on a third of the market, expects “moderate” growth in its asset-based lending staff this year, although the company declined to report its headcount and the number of expected hires.

Meanwhile, JPMorgan Chase, the No.3 asset-based lender in 2009, is expanding its 300-worker asset-based lending unit through the American West, a push that includes opening a new 10-person office in Irvine, Calif.

The initiative is already paying off. In recent weeks, the Wall Street giant injected capital into a California tomato-processor and a Seattle-based coffee-bean roaster. “These are exactly the kinds of businesses that we expected to help,” said John Goldthorpe, executive who heads the firm’s business credit unit. “We’re absolutely committed to the lower end, as well as the higher end.”

Small Is Beautiful
Still, as big banks slug it out for market share, a rash of boutiques scooped up a lot of the demand that the bulge bracket deserted during the crisis.

TD Bank, a unit of Canadian-based TD Bank Financial Group, has grown aggressively in recent months and is looking to break into the “top tier” of asset-based lending, according to Barry A. Kastner, who was hired from Wachovia to head TD’s asset-based lending practice.

“We think there’s room for another significant player in the market,” Kastner said. “Typically we see demand in the struggling industries…and pretty much everybody is struggling these days.”

Riding momentum from the crisis, TD plans to hire about 20 workers this year in its ABL division. It is also gearing up for an expected wave of mergers and acquisitions, deals that increasingly rely on asset-based loans to round out the financing.

Since it made its first loans in 2007, On Deck Capital Inc., a New York-based asset-based lender, has handed out $50 million to some 2,000 businesses, few of which had revenue of more than $3 million a year.

“The financial system has been focused more or less uniformly on the credit bureau, but had no system to take a broader look at the performance of a Main Street small business,” said On Deck founder and CEO Mitch Jacobs. “Now, we’re counting on these businesses to push our economy forward and this century-old problem is in the spotlight.”

Jacobs is shopping for 20 new employees this year and its bad-credit expenses are “remarkably low”.

In 2009, Cole Taylor in Chicago opened six offices across the country to offer asset-based loans; it has plans to open two more this year, including a New York branch. And it has hardly marketed its new offerings; the deals have been dropped on its doorstep by attorneys, investment bankers and consultants.

“Let’s face it, every company in the country saw their results fall off a cliff last year; and a lot of banks have their own problems,” Sharkey said. “There’s just a lot of reasons for companies to be testing the [asset-based] market right now.”

What It Takes
Although the borrowers that pledge assets are generally smaller and less-complicated enterprises than those that pursue traditional loans, asset-based lending is, in many ways, a risky proposition. Many clients have spotty or short track records, so due diligence is integral.

Successful asset-based lenders need to understand finance as well as the particular collateral at stake — be it rolled steel, restaurant revenue or crimson T-shirts. Some folks in the industry are in contact with their clients virtually every day and many of them spend days in the field, checking up on their clients and their collateral.

JPMorgan, for example, is shopping for finance pros in the cities where it hopes to expand, which includes San Francisco and Denver. It wants people who know the lay of the land and the local industries, according to Goldthorpe.

Often, the best asset-based lenders come from within a particular industry or have spent time analyzing a specific industry or line of business.

“It’s a very specialized skill set,” Kastner said. “You just can’t take a banker that has always lent to successful, large businesses and expect them to do well with it.”

The one imperative, according to managers in the sector, is being comfortable with distressed companies — a trait that more and more of us have these days than in the past.