Before the credit crunch, new business owners were using stated income home equity lines and no/low-doc lending programs to pull out up to 95% of the equity in their principal residences, Hines said. Banks returning to traditional lending standards now require proof of income and have lowered the loan-to-value ratio for home equity loans to 80%.

"Credit card financing is still available, but issuers have raised interest rates and require higher consumer credit scores," Hines said. "Start-up businesses and service firms, without real estate or equipment to collateralize a traditional small business loan, also face higher interest rates and stricter lending standards."

Small businesses that rely on consumer spending for household goods and home improvements are struggling, Hines explained. These businesses benefited when consumers "used cheap home equity loans to remodel kitchens, furnish newly purchased homes, and landscape new yards."

"Nevertheless, as in the case of commercial real estate, small business real estate lending remains resilient," Hines said. "For small business owners with documented cash flow and income, financing is available for real estate purchases."

Meanwhile, the demand for Small Business Admin-

istration loans has been "mixed," according to TowerGroup research. Some banks reported increases in both loan units and dollar volumes, whereas others reported a drop in loan units while increasing dollar volume. Under SBA lending programs, the SBA guarantees up to 85% of the loan.

"Banks are more willing to extend credit to businesses that would not otherwise meet underwriting standards, particularly as banks tighten credit guidelines in the wake of the credit crunch," Hines said.

TowerGroup said it expects to see continued growth in 2008 for business lending, driven most notably by emerging economies and by lenders targeting small and medium enterprises or middle-market firms.

"For the commercial and small business lending sectors, the greatest impact of ongoing instability in the credit markets is likely to be a renewed focus on traditional underwriting practices and the 'three Cs' of credit: character; capacity; and collateral," Hines said. "In order to continue on its recent growth track, commercial lenders need to get back to basics in terms of focusing on credit quality, loan covenant enforcement, risk-based pricing, and strong loan documentation across all loan types."

TowerGroup believes that loan underwriters will also spend more time on risk assessment, financial statement analysis, and legal review in 2008, Hines said. This year, some businesses may also have a tougher time refinancing existing short-term debt because of uncertainty over cash flows in a weakening economy.

"As a result, financial institutions will see increased use of pre-existing commercial lines of credit," Hines said. "Businesses using loan products based on the prime interest rate such as business credit cards and adjustable rate lines of credit will benefit from continued reductions in the U.S. federal funds rate."

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