For the third consecutive year, the Bush administration's proposed budget is attempting to eliminate the Microloan program, which provides small loans to would-be entrepreneurs lacking the credentials to secure traditional financing. And, for the third year, members of both parties in Congress are attempting to keep it alive.

The Microloan program, which is run by the U.S. Small Business Administration, has helped entrepreneurs like Tammy Demeyers, a 35-year-old single mom who opened her own hair salon in Gladespring, Va. She initially borrowed $2,500 to set up shop four years ago. After paying that down, she borrowed $6,500 more to expand last summer -- and business has been flourishing since.

"I'm a single mother of three teenagers, and it keeps us off welfare," Ms. Demeyers says. "People don't really know how much of a difference it makes in our life. You need money to make money."

While the program has already been rescued from elimination in the past two budgets, its fate probably won't be known until later this year. Last month, the Senate passed a bipartisan amendment to its budget resolution, a nonbinding blueprint that would add $130 million to the president's proposal for the SBA, bringing its total budget to $754 million, including funding for Microloan. But the House has yet to act, and it's unclear what appropriations will ultimately be made.

The microlending operation, which provides funding to nonprofit community-based lenders who, in turn, lend and provide technical assistance to small-business and individual borrowers, cost about $15.5 million last year. Republican and Democratic members of Congress -- from both the Senate and House small-business committees -- are working to keep it alive.

"The beauty about the Microloan program is it takes people from welfare to business ownership," says Rep. Nydia Velazquez (D., N.Y.), ranking member of the House Small Business Committee. "It provides the technical assistance they need to be successful."

The administration's budget proposal says the microlending program has been "excessively expensive" relative to other programs, and that similar borrowers can be served through the so-called CommunityExpress arm of the SBA's largest lending operation, the 7(a) program, which operates through traditional banks.

"It can be done much more efficiently and effectively at a far lower cost" through the 7(a) program, says Mike Stamler, an SBA spokesman, noting that 35% to 40% of 7(a) loans made -- there were a total of 89,000 loans last year for a total of $14 billion -- are under $35,000, the maximum Microloan amount that can be borrowed.

But while the 7(a) program aims to help entrepreneurs who might not qualify for a regular loan -- the government guarantees up to 85% of the loan's value, making it more attractive for lenders -- microlenders believe their clients, who tend to be even riskier loan candidates, might fall through the cracks.

"This is not about the dollar size, this is about the type of borrowers. And borrowers of the Microloan program have lower credit scores," says Anna Siefert, operations manager at Nevada's Microenterprise Initiative, a private nonprofit community-development institution that participates in the program. "They will not qualify for the 7(a) loans."

"When you go into the bank, they have to underwrite the risk right then and there," adds Phil Black, director of community economic development at Southwest Virginia Community Development Financing Inc., a nonprofit Microloan participant and unit of People Inc., a nonprofit community-action agency in Abingdon, Va. "We can think beyond the loan decision and [about] how we can reduce [the borrowers'] risk of failure by providing the technical assistance throughout the life of the loan. Rarely do they come in with a business plan with a bow around it."

The assistance such groups provide -- starting before a loan is made, continuing after it closes, and ranging from visiting the place of business to assisting with a business plan -- is critical, they say. And the results are tangible. "We are interested in creating a job for the owner and having an asset-building strategy, but we're also finding that these businesses create other jobs for those in the community," Mr. Black says.

Separately, the Bush budget plan, which was released in February, also proposes charging entrepreneurs borrowing more than $1 million through SBA programs a new administrative fee to help cover the costs of running the programs. Those who borrow through the 7(a) program would be charged 0.04% of the loan amount, while those using the 504 program, which is often used for financing real estate, would be charged 0.11% of the loan amount. Meanwhile, annual fees to lenders that are part of the 7(a) program would increase to 0.55% of outstanding principal on the guaranteed portion of loans from 0.545%.

Some bankers, along with members of Congress, are concerned that the administration is pushing too much of the costs onto the banks and small-business borrowers. The SBA 7(a) program moved to a "zero-subsidy" plan in 2005, which means it operates on fees collected from borrowers and lenders and no longer requires federal funding. The fee that entrepreneurs pay, called a guaranty fee, rises with the loan amount: those borrowing $150,000 or less are charged 2% of the piece of the loan that the SBA guarantees; between $150,000 and $700,000, they pay 3%; there's a 3.5% fee above that up to $1 million, while the piece above $1 million triggers a charge 3.75%.

"I think we have to put a brake on the fees at some point," says Maria Coyne, executive vice president and head of SBA lending at the Cleveland-based KeyCorp's KeyBank. "We keep putting the burden on borrower and lenders, and it's going to price the program right out of existence."

While the zero-subsidy structure has been criticized, it has also been praised for keeping the lending program running smoothly and reducing taxpayers' burden; when the program was dependent on government appropriations, it occasionally had to be suspended -- or loan sizes had to be reduced to stay within budgetary limits.

"With a self-funding structure, it can respond to demand, whatever it is, rather than be limited by a finite appropriation and face periodic loan caps and shutdowns," says Mr. Stamler, the SBA spokesman, adding that the new fee would cover the cost of administering federal guarantees on the larger loans.

However, some SBA participants and congressional leaders believe the new charges would go too far. "None of these programs receive appropriations to subsidize loans," says Sen. Olympia Snowe (R., Maine), chairwoman of the Senate Committee on Small Business and Entrepreneurship, "yet the administration proposes to increase fees on small businesses to raise $7 million in revenue. Increasing fees paid by small businesses is not the way to reduce the budget....We should not make it more costly for them to get financing."

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