The federal government is developing initiatives to make billions of dollars of bailout funds available to small businesses through community banks, according to lawmakers and other government officials.

One approach, put forward by Sen. Mark Warner (D-Va.) on Wednesday, could combine resources from the Treasury Department, Federal Reserve and private banks to create a $50 billion pool of money that would be used to lend to small businesses.

Separately, the Treasury is developing its own plan that would be smaller in scale -- using around $10 billion of bailout funds -- and would not involve the Fed, according to lawmakers and other congressional sources who have been in contact with the agency.

Both proposals attempt to speed aid to small businesses, which government officials say are essential to economic recovery because they employ so many workers. But using the federal bailout for this purpose would be a striking shift from the program's original mandate, which was aimed more at righting the financial system than saving jobs.

"We are actively working on and reviewing several ideas for how to provide more credit to small business and the smaller banks that are more likely to lend to small businesses in their communities," said Gene Sperling, a senior Treasury adviser. He declined to provide details of the plan.

The Treasury is also developing other initiatives to help small businesses. It is planning to ask lawmakers to revamp Small Business Administration lending programs and extend aid provided to the agency through the Obama administration's economic stimulus package. It is also negotiating with a small-business financier to buy a package of SBA loans under a long-delayed program aimed at freeing up credit.

Warner said earlier this month that he fears the programs that Treasury officials are considering to help small businesses might not be "big enough," and that while billions in funds from the Troubled Assets Relief Program have gone to troubled banks that haven't been able to increase their lending, "we've done nothing for small business."

Funding the Effort

On Wednesday, Warner said he remains open to how such an effort would be funded, but one possible structure would have the Treasury reallocate as much as $10 billion in TARP funds to create a loan pool exclusively for community banks, which could lend the money to small businesses. The Fed would loan $35 billion to the pool, using loans as collateral to create a small-business loan fund. The small banks themselves would contribute $5 billion and agree to absorb some initial losses so that, as Warner said, "they would have skin in the game."

He added that he has pitched his plan to Treasury officials, independent bankers and Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. "The key here is that we move very quickly and aggressively to shore up small-business lending," Warner said, adding: "Small businesses are going to be an important piece of the recovery."

The topic of small-business lending also arose several times during a Senate Banking Committee hearing on Wednesday. "We've been in discussion with Treasury for some time about making the TARP program work better for community banks," Bair told lawmakers.

The Obama administration is also planning to ask Congress to revamp lending programs at the SBA and extend for another year programs included in the $787 billion stimulus package aimed at making that agency's loans more widely and cheaply available, according to congressional sources, who spoke on the condition of anonymity because no announcement has been made.

These proposals were included in legislation that was the subject of a hearing Wednesday in the House Committee on Small Business. The bill, among other measures, would increase the maximum amount that companies can borrow through SBA programs to $3 million from $2 million and waives for another year the fees borrowers pay for such loans, which are largely guaranteed by the government. The cost of these proposals has not been determined.

"In this economy, small businesses are struggling to find affordable loans, which is why the committee is working to modernize the SBA's capital access initiatives and ensure they meet businesses' current needs," said Rep. Nydia M. Velázquez (D-N.Y.), who chairs the Small Business Committee.

Long-Delayed Initiative

Separately, the Treasury is negotiating to purchase a $100 million package of SBA loans from Coastal Securities, a small-business financier, under a long-delayed $15 billion bailout initiative to aid the financial firms that package SBA loans together and turn them into securities that are purchased by investors. This process makes funds available for SBA loans.

To comply with the requirements of the bailout legislation, Treasury officials have offered the company a deal. It would be able to issue a stake to the government and then repurchase it immediately if it sold its package of loans to the government.

But this quick-flip idea has not persuaded others to participate. Still, government officials are pursuing the Coastal Securities deal to make sure the program is operational in case the markets take an unexpected turn for the worse.

"You can't quantify how much knowing that government programs were coming effected investors' willingness to get back into the market," said Chris Melton, an executive vice president of Coastal Securities.

SBA loans represent only a small portion of small-business lending. The rest of the market remains frozen as lenders are still wary about issuing new credit to small businesses, seeing them as a risky bet in a struggling economy.

"Every member has been hearing on a repeated basis from small businesses that are concerned about the lack of credit," Warner said. "There is enormous need out there."