The U.S. Small Business Administration’s lending in Rhode Island has declined for three straight years, and the contributions of its top lender, Citizens Bank, have shrunk to just a fraction of what they were in 2004.

Citizens loaned just under $5 million through the SBA in Rhode Island during fiscal 2007, compared with $28.6 million three years earlier –– a decrease of more than 80 percent, according to figures from the SBA. That’s more than twice the rate of decline for overall SBA lending in the state during the same period.

Nationally, small businesses create 60 percent to 80 percent of the country’s new jobs annually and account for about 50 percent of the nation’s non-farm gross national product, according to the SBA Office of Advocacy Web site.

In Rhode Island, small businesses, which the SBA defines as having fewer than 500 employees, made up more than 96 percent of all employers in 2006, according to government data published by the SBA.

Yet, for all their collective economic clout, small businesses often are at a disadvantage when it comes to borrowing. Small businesses, new ones in particular, typically lack the collateral to back up loans, as bigger companies do, and their earnings tend to be more volatile and therefore less attractive to banks.

That’s where the SBA comes in. The agency offers loan guarantees of up to 75 percent or 80 percent of the loan amount, which assures the banks they will get most, if not all, of their money back.

In fiscal 2004, SBA-guaranteed loans in Rhode Island climbed to more than $106.6 million, up 28 percent from the prior year. That year, Citizens, the top SBA lender in the state since 1995, contributed $28.6 million in SBA-backed loans –– more than double the next-biggest lender, Bank Rhode Island.

Then the lending volume began to shrink.

SBA lending in Rhode Island during the next three years declined 36 percent, to $68.1 million in fiscal 2007, according to agency data. Citizens’ participation in SBA loans during that same period fell 83 percent.

Citizens attributes the decline in its SBA lending mainly to decreased demand.

“There is capital available today that you can access without the [SBA] guarantees,” said Kenneth B. Martin, executive vice president and director of business banking for the bank’s parent, Citizens Financial Group. “That is typically the case when you have a good economy and a very competitive banking landscape.”

In other words, the small-business loans offered through the SBA are being replaced by other types of bank loans that are often “less expensive,” Martin said, and therefore more attractive.

Not so, said Mark S. Deion, president of a business-planning consulting firm, Deion Associates & Strategies Inc., and a small-business advocate. He said that what appears to be a lack of demand is actually the result of businesses getting discouraged with banks.

“Let’s put it this way: If you know you’re going to get laughed at in the face, why ask?” Deion said. “People are using home-equity loans and their credit cards ... and they’re paying 13 percent [interest]. The reason is it’s easier to get the money. … It’s the path of least resistance.”

SBA lending in Rhode Island has declined, Deion said, in large part because state lawmakers in 2005 repealed a tax credit that reimbursed small-business owners for certain loan fees. Also, Congress a few years ago discontinued its subsidies for the SBA program, which further eliminated incentives to participate, he said.

Nationally, the decline in SBA lending — down about 7 percent in dollar amount through its main program during last year — is raising concerns that growing mortgage defaults are prompting credit tightening, which could extend into commercial lending. A Federal Reserve report released in February found that a third of banks in the country had tightened their lending standards for small-business loans.

To make matters worse, small-business owners who have been using home-equity lines to finance their businesses, Deion said, now find that their houses are worth less — so some have little or no equity to borrow against. Business owners who relied on credit cards are also getting squeezed, he said, since credit-card companies begin to hike rates in unison whenever a cardholder misses a payment on one credit card. The practice of creating a “universal default rate,” he said, began about 1 ½ years ago.

Citizens maintains that, on the whole, its business banking throughout New England — in terms of both loans and deposits — has been experiencing “annual double-digit growth since 2005,” spokeswoman Kathy O’Donnell said in an e-mail. The bank increased its small-business checking accounts last year by 15 percent, she said, and is adding business banking jobs throughout the company, including Rhode Island, “as further evidence of our commitment to this sector.”

Said Citizens’ Martin, Rhode Island’s elimination of the tax credit for SBA loans “certainly hasn’t helped” SBA lending. But as for any impact from the subprime market problems, he said, “I haven’t really seen us shutting our faucet.”

larditi@projo.com