New numbers from the Small Business Administration give hard evidence about the toll of the credit crunch and show it was especially harsh the past two months.
For the SBA's fiscal year that ended Sept. 30, loan volume in the 7(a) and 504 programs fell 13%, to $18 billion.
The number of loans fell 29%, to 78,317.
Lately the lending landscape got even gloomier than those numbers suggest, said Eric Zarnikow, the agency's associate administrator for the office of capital access.
The number of loans in August and September dropped more than 50% compared with last year, Mr. Zarnikow said.
One reason for the shrinking loan volume is that businesses are not borrowing as much, but at the same time banks are getting more skittish about making loans, even with the SBA guarantee.
The SBA is counting on the Treasury Department's rescue plan to reinvigorate lending. Small businesses and lenders are hunkering down, and their confidence in the economy needs a boost to prompt more loan applications and approvals, Mr. Zarnikow said.
"The trust and confidence in the marketplace needs to be rebuilt," he said. "As long as it continues to be broken, we're likely to see a further deterioration of lending activity and the economy. It's something that tends to ripple across markets."
Some bankers said SBA lending is down because there are fewer borrowers. But capital constraints, slowing deposit growth, tighter credit standards, and general economic concern are factors as well, observers said.
Kim Storey, the SBA program manager for the $619 million-asset Highland Bank in St. Paul, said it has made 30% fewer loans this year because of a decrease in applications.
"In the past I used to get a whole bunch of calls every week from people starting a business or people just cold-calling banks wanting to come in and meet," Ms. Storey said. "There just hasn't been that activity in the past year."
The number of weekly calls has dropped from about a dozen to one or two, she said.
She speculated that fewer people are interested in starting or expanding a business because of the economic uncertainty. "They don't really want to make any moves or changes until they get a little more comfortable with what's going to happen."
Ms. Storey said Highland has always been a conservative lender and its credit standards have not changed. It typically approves loans for 10% to 15% of the startup businesses that apply, she said.
Mr. Zarnikow said the SBA's lending partners have reported that applications are down and that those who do apply are less creditworthy than in the past.
Economic pressure is to blame, he said. "Energy costs are up, a lot of commodity costs are up, and businesses may be seeing lower sales."
He also said that small-business owners often use the equity in their homes as a source of collateral for their loans, and with housing prices down in many parts of the country, that collateral is weaker.
But some lenders are tightening their credit standards, and that accounts for at least part of the lower loan volume, Mr. Zarnikow said.
In a July survey by the Federal Reserve Board, 70% of senior loan officers said their companies had tightened credit standards for commercial and industrial lending, more than double the percentage that said so at the start of the year.
Paul Merski, the chief economist for the Independent Community Bankers of America, said that regulators have been pressuring banks to improve their credit standards.
He said banks' need to maintain stronger capital levels also constricted lending.
Kenneth E. Bentsen, the president of the Equipment Leasing and Finance Association, a trade group that includes banks, said many of its members reported that they began to experience capital constraints in August.
They also hiked the rates charged for loans, leading to a drop-off in borrowers, he said.
Martin Regalia, the chief economist for the U.S. Chamber of Commerce, said its business members had a much harder time getting credit in September.
The rescue plan should help keep the credit crunch from worsening, Mr. Regalia said.
"This is a situation that can get very much worse than what we're currently seeing," he said.
"The people sitting on Main Street saying this is just a Wall Street problem I think are whistling past the graveyard."