NEW YORK - US SMALL businesses, already facing the toughest credit conditions since the 1980s, may soon find things are about to get tougher.

Concerns over the future of CIT Corp - a major lender to small businesses - which provides capital in situations where many commercial banks fear to tread, makes small business advocates wary about the next few months.

Since small business is typically a major driver of the US economy, any barrier to this sector's recovery could mean a longer, slower US economic revival, and could limit the effectiveness of the government's stimulus dollars.

CIT has tried various capital-raising plans, including growing its retail bank and selling assets and stock, to pay off maturing debt and avoid further ratings downgrades.

CIT said it was talking to the US government to gain access to funding, but that there was no guarantee the Federal Deposit Insurance Corp would approve its application to join the Temporary Liquidity Guarantee Program. That has exacerbated a liquidity crunch and led CIT To explore a possible bankruptcy filing, The Wall Street Journal said.

'The CIT crisis takes a lending source that's been relatively active in a very tight credit market and eliminates one more source of capital,' said Mr Ken Gaebler, president of Gaebler Ventures LLC, a consultancy that helps entrepreneurs raise capital and acts as a business incubator.

CIT's failure, if it happens, would pull existing lines of credit, forcing creditors to seek alternative funding.

What are those alternatives? 'Good question,' Mr Gaebler said. 'Everybody we talk to says, (that) despite anything you heard about stimulus programmes loosening credit, people are very shy to make business loans.'

'This to me is very scary,' said Mr Michael Alter, president of SurePayroll, which handles payroll for some 20,000 small businesses. 'CIT may be too big to fail.' The first thing small business owners did on Monday, upon reading of the problems at CIT, was max out their credit lines, Mr Alter said. That only puts more pressure on CIT.

The US government may need to organise an orderly selloff of CIT assets, injecting enough liquidity to keep CIT operating while shutting off new loans, he said. CIT's loan portfolio includes many healthy loans that could attract an investor, adding that the sale of investment bank Bear Stearns could serve as a model. -- REUTERS