By Kevin Galvin

A lack of available loans is preventing small business from sharing in the nation's economic recovery, bankers and lawmakers said Thursday, and Sen. John Kerry introduced a bill designed to ease the credit crunch.

The proposal would package small business loans into mortgage-backed securities to free up credit for small business growth and, as a result, help create new jobs.

"It will not cost the government money," Kerry, D-Mass., said during a Senate Small Business Committee hearing Thursday. "It is a way of rapidly providing credit to the market place."

Small businesses employ as much as 70 percent of the American workforce, and small business growth is considered key to economic recovery. But loans to small businesses have lagged since the 1991-1992 recession.

Export sales were rising at Woburn-based ICON Corp. and the business was growing by 30 percent a year when its chief lender, the Bank of New England, failed in 1991. George Burnell, president of the 35-man firm which makes automated assembly systems, told the committee federal regulators then slashed his credit in half, to $400,000.

"We were forced to sell off demonstration equipment, reduce our marketing efforts and withdraw from the export market," Burnell said. The company has had no luck in finding new loans. "It's as if Agent Orange had obliterated New England and now we have to figure out how to be productive in the acrid soil."

The number of places where small business owners can go for backing is limited. Major institutional investors such as pension funds and insurance companies won't lend and small firms aren't large enough to trade on financial markets.

The Kerry plan would create a government-chartered corporation similar to Fannie Mae and Freddie Mac to package small business loans and sell them as mortgage-backed securities on stock and bond markets.

Kerry's bill is based on legislation offered by Rep. John LaFalce, D-N.Y. LaFalce's plan has had little success in the past, but it has gained new life thanks to the credit crunch. The entity created by the bill would be called the Venture Enhancement and Loan Development Administration -- or "Velda Sue."

After the program raised $30 million in private funds, the government would sponsor Velda Sue with initial loans of up to $300 million. The loans would be repaid to the U.S. Treasury within 15 years, with interest.

To qualify for a Velda Sue loan, a firm must qualify as a small business under the Small Business Act: It must not have a net worth of more than $18 million or an average net income in excess of $6 million.

Velda Sue would back only 80 percent of each loan, leaving the other 20 percent to the local lender to insure that the lending institution shares in the risk of default.

Tighter banking regulation stemming from last year's recession and recent bank failures have tied up credit for small businesses.

As real estate prices fell, regulators put banks under tight lending restrictions and forced them to write off capital. Banks have since held back lending to avoid trouble with regulators, according to William Brandon Jr., president of the American Bankers Association.

"Excessive paperwork and red tape are driving up the cost of running a bank and therefore the cost of bank credit," Brandon told the committee. "What does this mean for my community and for communities across the country? It means more expensive credit and less of it.

"Large corporations can go directly to money and capital markets to raise funds," Brandon said. "Even consumers have other sources for home mortgage loans, credit cards and auto loans. But for small businesses, bank financing is critical."

Kerry criticized regulators for not easing the restrictions.

"You don't have to be a bank analyst or a member of the Federal Reserve or a genius to know that it is not small business failures that brought these banks down," Kerry said. "Yet small businesses have become the most significant victims of this new process.

David Mullins, vice chairman of the Federal Reserve System Board of Governors, conceded the regulatory process should be streamlined.

"The economy is starting to pick up, even in New England, but the loans have yet to flow," Mullins said. "This is what makes us think, with this improved climate, that we can have an impact."

The Bank of Boston provides a good example of the current demand for small business loans. In May 1991, the bank offered a $3 billion loan initiative for New England companies and set up a hotline for interested business owners.

"Since May, almost 9,000 New England companies, overwhelmingly small businesses, have called the hotline," said Chad Gifford, president of the Bank of Boston, said in a telephone interview. "And those companies were saying, 'We need credit."'

Gifford said the bank decided earlier this year to increase the loan fund to $6 billion to keep up with demand, even though government regulation "makes it difficult and onorous to justify these loans.

"We're doing it because we think it makes good business sense and the economy needs it," he said.