The funds, announced Thursday, will be made available from the government's Troubled Assets Relief Program, or TARP, in a financial entity similar to a revolving credit. Large suppliers would be eligible for financing auto parts they have shipped to the Detroit carmakers but have not yet received payment.
U.S. automakers - General Motors Corp., Chrysler LLC and Ford Motor Co. - will have the option of using the program and designate the companies that need financing, giving them a large role in determining which parts suppliers will survive.
GM and Chrysler, which have received $17.4 billion in government loans, said they would use the program. Ford, which has not sought the government aid, said in a statement it would not participate "as we remain viable and expect no issue with continued payments to our suppliers."
The action was intended to help with the cash flow needs and stability of distressed auto suppliers, whose collapse could lead to the disruption of car production by the Big Three and inflict more damage on the economy.
Members of the auto task force, who spoke on condition of anonymity because their discussions have been private, said the financing was a first step in restructuring the car industry. They expect to provide a framework for revamping GM and Chrysler by March 31.
"The program will provide supply companies with much needed access to liquidity to assist them in meeting payrolls and covering their expenses, while giving the domestic auto companies reliable access to the parts they need," Treasury Secretary Timothy Geithner said in a statement.
Officials said foreign automakers with U.S. operations would not be eligible to use the so-called "supplier support program."
Lawmakers from Michigan and other states with auto manufacturing cheered the announcement, but it was met with resistance from some Republicans who said the TARP funding should not be used to prop up manufacturers.
"The administration needs to work with Congress instead of running the country by executive fiat without checks and balances on the use of taxpayer money," said Sen. Bob Corker, R-Tenn.
Auto suppliers have sought up to $25 billion to stabilize the beleaguered U.S. auto industry and have met with members of President Barack Obama's auto industry panel, which is trying to restructure GM and Chrysler. The two companies want an additional $21.6 billion in aid.
Neil De Koker, president of the Original Equipment Suppliers Association, said he was "very optimistic that this will provide many companies with the relief they need."
But the program was not intended to save company in the supply chain. Treasury officials said certain suppliers would still fail as part of the natural business cycle and analysts expect some suppliers to collapse because the industry has too much manufacturing capacity for current sales levels.
David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., said the financing will likely be used for suppliers that make complex engineered components that are made by few companies. Suppliers that manufacture body side moldings and other parts that can be duplicated elsewhere will not likely receive the aid, he said.
In a statement, General Motors said the program could "reduce the risk of vehicle production disruptions that would occur if auto suppliers were unable to produce due to lack of access to working capital liquidity." Chrysler spokeswoman Shawn Morgan declined to comment.
Suppliers who ship parts to car companies typically receive payment for those shipments about 45 to 60 days later. Under normal credit conditions, suppliers sell or borrow against those commitments to pay their workers and fund their operations.
But banks have been unwilling to extend credit to suppliers because of the uncertainty of the auto companies, so the government entity will help parts suppliers access financing.
Under the program, auto companies will be required to pay a 5 percent fee of up to $250 million to join. Suppliers will have to agree to terms of the government-backed protection and pay a small fee to participate. Suppliers will be able to sell parts that they have not yet been paid for into the government program at a modest discount.
Parts makers employ about 600,000 people nationwide and many of the nation's roughly 5,000 suppliers have been cash-strapped for several years as GM, Chrysler and Ford have reduced car and truck production because of falling sales. Their outlook has deteriorated with the economic downturn, a steep decline in auto sales and prolonged car plant shutdowns in December, January and part of February.
American Axle & Manufacturing Holdings Inc., Visteon Corp. and Lear Corp. have all warned in recent weeks that they could be forced to file for bankruptcy protection if business didn't pick up soon.
Meanwhile, Delphi Corp., GM's former parts division, is still trying to restructure itself after more than three years under Chapter 11 bankruptcy protection.
In all, auto suppliers have said that more than 40 major suppliers have filed for Chapter 11 bankruptcy protection and more could collapse if the government does not act.
Parts suppliers told Treasury that the estimated March 2009 payments to suppliers from the Big Three automakers are $2.4 billion, compared with an average of $8.4 billion per month in the fourth quarter of 2008, threatening their industry.
"This aid comes at a critical time for this vital industry," said Rep. John Dingell, D-Mich. "I am pleased the program will be able to keep the doors open and lines operating at many U.S. auto suppliers."