The U.S. Treasury Department is working on a program to provide loan guarantees to auto dealers, trying to prevent a wave of failures as General Motors Corp. (GM) and Chrysler LLC restructure.

Treasury's auto task force is working with the Small Business Administration on the program, which would back loans for dealers to purchase vehicles to stock their showroooms. The SBA would administer the program.

"We can confirm this is something we are working on," a Treasury spokesperson said Friday, declining to comment further.

Auto dealers are eligible for SBA loan guarantees for certain purposes but not for inventory purchases, known in the auto industry as floorplan financing, said Jonathan Swain, an SBA assistant administrator. Expanding SBA guarantees to cover floorplan financing has been done once - under a directive by President Jimmy Carter during a similar crisis facing auto dealers in 1980 - Swain said.

"Our regulations have never permitted us to do it, except for the rare exception when the president elected to do it in 1980," Swain said.

Details, including the timing and potential size of the guarantees, haven't been worked out.

In addition to a regulation change by the White House, dealers are pushing for legislation in Congress that would allow the SBA, under a lending program known as 7(a), to back at least $5 million in loans to each individual dealer that qualifies, much more than what current law allows, said Bailey Wood, legislative affairs director for the National Automobile Dealers Association, or NADA.

The administration earlier this year expanded SBA loan programs to cover a broader set of companies.

NADA officials met with the Treasury task force and officials at the Office of Management and Budget this week to discuss government aid for dealers.

Car dealers have found it increasingly difficult to obtain loans amid the broader credit squeeze and the plunge in auto sales. The bankruptcy filing of Chrysler LLC and the likelihood of a filing by GM has tightened the squeeze amid fears that the values of those companies' vehicles will plummet, thereby making it harder for dealers to pay back the loans.

NADA has urged the implementation of guarantees that would help prevent dealer failures that could result from so-called clawback provisions, which allow finance companies to demand at least partial payment of dealer inventory loans in the event of an auto-maker bankruptcy.

NADA's Wood said he didn't know collectively how much dealers needed in government aid but warned that many are on the verge of shutting down because of a lack of credit.

"There are dealers across the country who are having unbelievable problems getting access to inventory financing," Wood said.

The prospect of government aid follows announcements by GM and Chrysler this week that they planned to radically cut their dealer networks as part of their restructuring.

-By Josh Mitchell, Dow Jones Newswires; 202-862-6637; joshua.mitchell@dowjones.com