Not all banks are tightening credit. As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners. As the credit freeze continues and the recession deepens, many community banks, generally defined as having less than $10 billion in assets, are reporting an uptick in loans and credit lines to small businesses.

At a congressional hearing on small business and the economic recovery in January, economist, Paul Merski, of the Independent Community Bankers of America, a Washington DC trade group, told lawmakers that community banks make 20 percent of all small business loans, even though those loans represent only about 12 percent of all bank assets. Furthermore, he said that about 50 percent of all small business loans under $100,000 are made by community banks.

For the past two years, small business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. "Community banks are quickly taking on more market share, not only from the top five banks, but from some of the regional banks," said Christine Barry, Aite's research director. "They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place, to serve these customers."

Some of the factors that make community banks attractive during a strong economy have added appeal for business owners dealing with the effects of the downturn. Unlike their larger counterparts that normally make and approve loans by adhering to a set formula of criteria, often without an in-person meeting, community banks do meet in person and apply a variety of standards to approving a loan. They are willing to consider businesses that do not fall into neatly defined parameters. Moreover, loan officers often have an intimate knowledge of the local area and its businesses.

Portions of this article were excerpted and edited from a story in Business Week.