By Gwendolyn Bounds

MOUNT VERNON, Ohio - Two years ago, Torren Wagner found his truckbed-lining business on the brink of disaster. Sales had slowed dramatically in the cold weather, and he'd fallen behind on bills.

"I was scared to death," says Mr. Wagner, 34 years old. "But if I failed, I lost everything."

That's because nearly everything he owned was already collateralized for his business, from his 800-square-foot house to the John Deere tractor in his garage. Even his mother was on the line because she had co-signed a previous loan. So one evening, Mr. Wagner, an amputee, scoured his home looking for anything of value to help secure financing. He found the unlikely answer leaning in a corner: his $20,000 prosthetic leg.

In the world of commercial loans, attempting to get a loan with a false leg won't pass muster. But Mr. Wagner wasn't working with a typical lender. He was a borrower with the U.S. government's MicroLoan program, which helps entrepreneurs obtain funding they can't often get from traditional lenders because of their poor credit and lack of bank-worthy assets.

Long under the radar, the program was slated to be cut last year, but was saved by an unusual bipartisan push in Congress. The battle isn't over: In the 2006 federal budget released Monday, the Bush administration once again called to end the MicroLoan program.

Critics say MicroLoan is too costly, in large part because it also helps pay the salaries of people who assist borrowers with their business problems. The Small Business Administration says other programs from the agency and the private sector can serve MicroLoan's clientele.

Started in 1992 under the first Bush administration, the MicroLoan program is a tiny part of the SBA. Last fiscal year, it funded 2,405 new loans, totaling $32.7 million; in addition, $15 million was spent for "technical assistance," to help advise borrowers. By contrast, the SBA's largest loan program funded 74,825 loans, totaling $12.55 billion.

MicroLoan defenders say the program may save taxpayer dollars in the long run, by keeping borrowers from needing permanent public assistance. They argue many MicroLoan candidates wouldn't qualify for the SBA's largest program. An SBA spokesman says the MicroLoan program has a "minuscule" default rate.

In a letter last year to the Senate's appropriations committee, Republicans including Sen. Olympia Snowe, of Maine, and Sen. Christopher Bond, of Missouri, broke with the president to request the program continue, saying its beneficiaries have "no other available option." Last month, Democratic Sen. John Kerry proposed legislation to bolster the program.

One hallmark of the MicroLoan program is that it allows applicants to offer up unusual collateral. In Minnesota, a horse-riding stable was backed after a horse, tack and a trailer were accepted as collateral. A widow's Romanian wine-import business received funds, using the wine as part of the security. In Ohio, a bait farmer got into business by collateralizing earthworms, while another entrepreneur, seeking to get into publishing, secured financing with a 1984 Nissan Maxima and used-camera equipment, among other things.

Mr. Wagner's experience shows the tensions surrounding the debate over how to help the nation's most desperate entrepreneurs. He lives in the same area where he was born, Knox County, Ohio, where American flags and handwritten "God Bless America" signs adorn front yards. Median household income here is $38,877, below the national U.S. median of $41,994, according to 2000 census data. His house, which sits amid corn and soybean fields, was in teardown condition when he bought it in 1991. After he personally hung drywall, ran electrical wiring and installed plumbing pipes, it was appraised at $58,500.

Mr. Wagner's leg trouble began in his teens, when he suffered chronic swelling and pain in his right knee. Doctors eventually diagnosed him with a rare joint disease that triggers excessive growth in the joint's lining tissue.

Between 1990 and 1994, he underwent five surgeries. Three were paid for by the government, and two were paid for by his insurance, after he got a job at a cardboard-making factory. After his fifth surgery failed to alleviate the pain, Mr. Wagner drove 13 hours to the Mayo Clinic in Minnesota for another opinion. Doctors advised amputation.

After that, Mr. Wagner, who has a high-school education, says he found employment options limited. "The type of job that I would qualify for educationally, like construction, I couldn't qualify for physically," he says. He worked at a small airport fueling planes, and did office work. He received public assistance at times, including food stamps.

Struggling to pay bills, he went without a telephone. His mother helped pay his $350 mortgage. Local churches donated groceries and sometimes paid to turn his lights back on after the utility company disconnected them.

In the fall of 2001, a friend suggested he look into buying a dealership from Rhino Linings USA Inc., a San Diego-based company that sells spray-on polyurethane linings to protect truck beds. Mr. Wagner, who loved trucks and knew they were plentiful in his area, was interested. But the price of a dealership _ about $25,000, for spraying equipment and chemicals, among other things _ was well out of his reach.

Mr. Wagner didn't qualify for a traditional bank loan because he'd been late on his mortgage and utility bills. His 59-year-old mother, recently divorced after 25 years of marriage, was cleaning houses and had no savings to lend. Mr. Wagner says he no longer speaks to his father. Counselors at Ohio's Bureau of Vocational Rehabilitation, which paid for his prosthesis, told him about the MicroLoan program.

The SBA distributes MicroLoan money to nonprofit groups, which then dole it out to individuals. The loans are repaid to the SBA with interest. For Mr. Wagner, the face of the MicroLoan program was a 52-year-old former Golden Gloves boxer named Gary Seeley. Mr. Seeley runs Enterprise Development Corp., one of the nonprofits charged by the SBA to distribute loans. Since 1992, his group has borrowed $1.35 million from the SBA. The group is required to establish a reserve equal to 15 percent of all SBA money received, in case the people it loans to default.

Says Mr. Seeley, who is a big believer in the character-based part of lending: "You are looking for a person to say, 'I'll give you everything I own.' "

Mr. Wagner did nearly that to secure his first MicroLoan, of $27,052, in May 2002. In addition to a second mortgage on his house and first lien on his spraying equipment, he put up his tools and antique tractor. His mother's co-signing the loan was a big inducement. "I don't think a guy like Torren is going to let his mother go down," says Mr. Seeley. "He'll mow lawns until he drops before that happens."

His first year, Mr. Wagner says he worked every day, often until midnight. His mother, Janet, financed renovations of his shop _ a former car wash _ on her credit card. On her days off, she volunteered, greeting customers and plucking scraps of the rubbery lining material from the spray booth's walls.

Mr. Wagner faced obstacles from the beginning. According to Rhino, the average vehicle is finished in two to three hours. Mr. Wagner says the process sometimes took double that time for him to achieve the quality he wanted. Rhino says spraying is a one-man job. But because Mr. Wagner needs help maneuvering the hoses, he had to hire an employee.

As business slowed during the winter, cash flow problems began. He postponed paying utility and rent bills in order to buy supplies from Rhino, which requires dealers to buy set quantities of chemicals to keep their territory exclusive. About 30 percent to 40 percent of dealers don't make their quota each year, says Ken Harden, a Rhino vice president, who says the quotas exist to "ensure our dealers are focusing on our business from day one."

Mr. Wagner met his first two quarterly quotas, but missed the third in early 2003. Panicked, he returned to Mr. Seeley's group and offered his prosthesis as collateral for more funding.

"When he offered up his leg, my instinct was that he was so committed that he'd put in the hard work to be successful," Mr. Seeley says. He ultimately refused to take Mr. Wagner's leg, instead making a MicroLoan of $4,900, backed by his client's wooden bedroom furniture, VCR, Sanyo TV and speakers, among other things.

In 2003, his first full year in business, Mr. Wagner pulled in $111,000 in revenue, which Mr. Seeley says is impressive for a small start-up. Rhino says dealers who spray one truck a day pull in roughly $135,000 a year. Mr. Seeley believed there was potential for Mr. Wagner, and put his group's expertise behind him.

For instance, when Mr. Wagner inadvertently underpaid his employment and sales taxes by nearly $6,000, Mr. Seeley's office called him in, and pored through his paperwork to help figure out how much he owed and straighten out his books. Underestimating taxes "sounds like a huge blunder, but it's one of the most common problems out there," Mr. Seeley says.

A staff member went to Mr. Wagner's shop and installed software on his laptop to track expenses better. When Mr. Wagner got behind on bills to Rhino, Enterprise Development paid for his supplies for a while, letting Mr. Wagner repay them after each job.

This sort of hand-holding is what makes the MicroLoan program expensive, the SBA says. Last year, the $15 million in technical assistance for the MicroLoan program was divided between 150 nonprofits. The funding paid for part or all of the salaries of four of Mr. Seeley's staffers.

"At this point, it's like a marriage," Mr. Seeley says of his relationship with Mr. Wagner. "I'm in."

Mr. Wagner is trying to branch out to bigger jobs, spraying roofs and pool decks. For that, he needed a truck. Rhino sells its own fully equipped mobile unit for $50,000 to $70,000 _ far out of Mr. Wagner's budget. Instead, he renovated an old bread truck. His first job, he made $4,500, spraying a roof in six hours. He makes about $400 spraying each truck.

There are no guarantees. His business is in the winter doldrums. He needs to train new workers and advertise, but until he can land a big job, lacks the capital to do so. "A penny right now is gold to me," Mr. Wagner says.

His lender remains cautiously optimistic. "A lot of people I look at and think, 'they don't have it in them; they won't make it,' " Mr. Seeley says. "I don't look at Torren like that. I believe in Torren Wagner."