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Small businesses are turning to nontraditional lenders as banks reject many loan applications following the credit crunch.

Gentle Parking has grown quickly since William Ortiz-Cartagena started the San Francisco company two years ago. He now employs 25 people and says he turns a decent profit running six parking lots, including two he manages for the city. When he decided to bid on a contract to run another city-owned lot, though, two banks turned down his application, citing problems with his home mortgage. Ortiz-Cartagena turned to Opportunity Fund, a Bay Area micro­lender that had loaned him $10,000 to start his company. He soon got a $60,000 line of credit at 8 percent interest. "For a small business to get a city parking contract is unusual…because smaller companies can't carry the cost of insurance," he says. "It's like David and Goliath, and Opportunity Fund is my slingshot."

Microfinance lenders, originally geared to helping the disenfranchised, are providing more financing to small businesses that can't get bank loans. While microfinance represents a tiny fraction of the U.S. credit market, it's growing fast. The industry group Opportunity Finance Network says 56 percent of microfinance organizations last year saw increases in loan applications. Most likely to get funding were "people who were very strong small business owners who in the past would have received financing [from banks]," says Elaine Edgcomb, who studies microfinance at the Aspen Institute.

Domestic microfinance groups loaned $57 million in 2008 (the most recent data available), up 68% from a previous survey in 2002, according to the institute. The U.S. groups are typically supported by government agencies and nonprofits, and about 400 of them offer small business loans that average nearly $9,000 and are usually capped at about $35,000.

The industry received attention two years ago when Grameen America, an offshoot of Bangladesh-based Grameen Bank founded by Nobel Peace Prize winner Muhammad Yunus, opened in New York. Among the biggest U.S. micro­lenders is Opportunity Fund, which financed Gentle Parking. It is on track to make 200 loans this year, up 30 percent from 2009, says Chief Executive Officer Eric Weaver. "People get that we have to rebuild the economy in a sustainable way," he says. "Microlending fits right into that."

Even relatively tiny amounts of cash can make a big difference to a small company. Simonida Cvejic left her native Yugoslavia when war broke out, won grants to study abroad, and worked for Goldman Sachs (GS) in Silicon Valley before starting a school for medical technicians in 2005. By 2007 her Bay Area Medical Academy had grown to $500,000 in revenues. Yet when Cvejic applied for a $10,000 bank loan to lease and furnish more classrooms, neither her scrappy background nor her successful business was enough to win over traditional banks. Opportunity Fund loaned her $10,000. That helped her attract $20,000 from a private investor, and today her company brings in $1 million in annual revenue. "A lot of my business growth was based on my own revenue, but there are times when you need a capital injection," Cvejic says. "Opportunity Fund came in at a crucial point."

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The bottom line: As banks have been slow to boost credit for small business, microfinance groups have stepped up lending to entrepreneurs.