Banks are doing all they can to run lean and mean, especially in small-business lending.

Lenders to small firms are relying more on technology and better employee training to stay competitive while trying to keep costs in check.

"We're resource constrained," Todd Hollander, the head of the business-banking group at Union Bank, said at American Banker's recent Small Business Banking Conference in New Orleans. The $105 billion-asset bank, a unit of UnionBanCal, is poring over lots of research in an effort to "get the right salesperson in front of the right clients," he said.

Small-business lending is challenging on a number of fronts.

Demand is waning for such loans, many bankers say. The amount of small-business loans on banks' balances sheets at June 30 was down 3% from a year earlier, to $653 billion, according to the Federal Deposit Insurance Corp.

"We are really seeing a pullback from small businesses," Susan Still, the president and chief executive at HomeTown Bank in Roanoke, Va., said in a recent interview.

"There's so much uncertainty on the small-business end" because of concerns about insurance and taxes, added Brad Swickey, president and chief executive of Valiance Bank in Oklahoma City. "They have the money, but they just don't want to spend it."

Competition is also fierce for anyone who is in need of a loan. Numerous community banks that accepted capital from the Small Business Lending Fund are hungry to book loans. Nonbanks and credit unions are also fighting for business, which is driving pricing down.

Another complication is the costs associated with handling the accounts.

"It is a compelling business to be in," Dennis Devine, executive vice president of the consumer and small-business segment at KeyCorp's (KEY) KeyBank, said during a presentation at the conference. But often the revenue from banking "many small businesses will not cover the costs of serving them."

Banks are also challenged to adapt to changes in how small businesses define convenience, particularly when assessing the usefulness of branches. Small-business clients, who are the heaviest user of KeyCorp's branches, have been scaling back their use of the Cleveland company's offices in recent years, Devine said.

In contrast, mobile use among KeyCorp's small-business clients has tripled since 2009, while online banking has risen 16%.

Other banks have changed their hiring policies and improved training to boost production.

California Bank & Trust in San Diego has incorporated "behavioral interviews" into its hiring process, said Betty Rengifo Uribe, the bank's head of business and personal banking division.

The bank, a unit of Zions Bancorp. (ZION) in Salt Lake City, wants lenders who won't rely on slicing rates to drum up business. An intensive 60-day training on how to make a sales call, which the bank began offering in January, is "nonnegotiable for everyone," Uribe added.

The bank is also targeting clients who are willing to pay a little more for bankers with expertise in their field and who can give them advice."I'm not really looking at customers who are only interested in price," she said.

Nearing the final year of a three-year plan, California Bank's program has gained traction. Production among the bank's newest lenders is outpacing that of existing staff by 300%. Through June 30, overall loan production in 2013 is up 150% compared with a year earlier, even though the bank has 30% fewer lenders.

As a result, Zions is looking "to take our program to the rest of the organization," Uribe said. The impact could be huge; California Bank contributes roughly 22% of Zions' loans and 20% of the company's assets.

KeyCorp is also stepping up training and trimming costs. It launched a program earlier this year to certify about 300 employees as small-business experts. Meanwhile, the company has reduced the size of its branch network by about 8% over the past 18 months, Devine said.

In response to competition, bankers note that they must pay attention to what nonbanks are doing to court small businesses. Devine used his presentation to draw attention to eBay, which, through PayPal, is using internal data to determine creditworthiness, and Wal-Mart Stores' (WMT) Sam's Club, which is using digital channels to lure clients.

Small businesses "are voting with their dollars by doing business with you," Devine told conference attendees. "With an eye to the horizon, our focus has been providing clarity to the clients we've been trying to serve."