More Lenders for Small Firms, But Fewer Loans

WASHINGTON (TheStreet) -- While the downfall of CIT Group(CITGQ) has shined a light on the loan woes of small companies, the Small Business Administration says more lenders are stepping up to help the little guy.

The decline of CIT has been damaging for small-business owners. The number of 7(a) loans, the SBA's most popular option, from CIT plummeted from 1,195 in fiscal 2008 to 142 in fiscal 2009. In dollar terms, that's an 88% drop from $873 million to $105 million, according to the agency. However, the number of lenders that issued 7(a) loans rose 15% from fiscal 2008 to 2009, suggesting there are more places for small firms to turn.

"This increase can be attributed primarily to efforts in the Recovery Act to encourage more SBA lending," says SBA spokeswoman Hayley Matz. Between February and September, 1,260 lenders that hadn't made a loan since October 2008 lent money through the SBA's 7(a) or American Recovery Capital programs.

The U.S. government has been trying to reignite lending to small businesses through new programs and incentives. However, stiff lending standards and weak capital markets that are making it increasingly difficult for firms find the funding they need.

American Recovery Capital (ARC) loans, launched in June, allow companies in dire straits to borrow up to $35,000 with no interest. Borrowers can defer payments and lenders get a 100% guarantee from the SBA. As of Oct. 1, 740 lenders had issued ARC loans.

Under the 7(a) program, the SBA guarantees 85% for loans totaling less than $150,000 and 75% for larger amounts. This year, 7(a) loans for more than $1.5 million accounted for 21% of all loans issued by the SBA, up from 13% in 2005. The Obama administration wants to raise the cap on 7(a) loans from $2 million to $5 million.