A grim year for small business lending

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NEW YORK (CNNMoney.com) -- Here's a telling statistic about the toll the recession is taking on Main Street: This year, the government's top small business lending program got loans to 25,000 fewer entrepreneurs than it did last year.

In its 2009 fiscal year, which ended Wednesday, the Small Business Administration backed 44,221 loans from banks to help borrowers start and expand their businesses. That's 36% fewer loans than the SBA's 7(a) loan program made in 2008.

The program's total dollar volume also dropped sharply. Loans for this year totaled $9.3 billion, according to preliminary data -- down 27% from last year's $12.7 billion.

The SBA offers banks guarantees on the money they lend to qualifying small businesses: If the borrower defaults, the government pays the bank back for a portion of the loan. But applicants still have to persuade a bank that they're creditworthy, and lately, that's been an especially daunting challenge.

SBA officials point to one silver lining in their data: After hitting bottom late last year, the loan numbers have been slowly rebounding.

The month-by-month lending volume "really tells the story of what the Recovery Act has been able to do," said Jonathan Swain, the SBA's assistant administrator for communications.

In February, as part of the stimulus package, Congress allocated $730 million for the SBA to bolster new lending incentives. The agency temporarily waived its fees and increased the guarantees it offers banks on 7(a) loans. That helped motivate 1,200 lenders that had gone dormant to resume lending, Swain said.

This year's lending hit its nadir in January, when the 7(a) program processed loans totaling $484.4 million, down 48% from January 2008. In April -- after the Recovery Act provisions took effect -- loan volumes noticeably picked up, and September was the SBA's best month of the year, with $1.3 billion lent.

But the big-time players in the small business market have taken a big step back. Among 2008's top 10 SBA lenders, only Wells Fargo (WFC, Fortune 500) increased its lending this year, while the rest cut their loan volume by 30% or more. CIT Group (CIT, Fortune 500), last year's number-one largest lender, teeters on the edge of bankruptcy, while Temecula Valley Bank, last year's tenth biggest lender, was shut down by its regulators in July.

The SBA is aware of the toll the tight credit environment is taking, and is determined to keep building on the upward momentum of the last few months. "There are very aggressive and urgent discussions happening right now between the White House, the SBA, Treasury, and the National Economic Council," said Swain of the SBA.

Roughly half the nation's workforce is on the payroll of a small business. "It is a major priority for the President -- how we can continue to support small businesses and small business owners," Swain said. "How can we put them in a position to drive the economic recovery?