Two years into the financial crisis, small and midsize companiesreport that it's still tough to obtain loans from banks. In fact,58% of 560 small and midsize companies that negotiated orrefinanced a loan over the last three months say that it was harderto obtain credit than it had been a year earlier, according to thelatest quarterly survey by Greenwich Associates, and 36% of thosecompanies described it as “much harder” to borrow. Twenty-sevenpercent of companies say they saw no change in the difficulty ofarranging credit, and 15% say it was easier to borrow over the lastthree months than it was a year earlier.

The Greenwich Credit Availability Index measures how manycompanies view credit as easier vs. harder to obtain. The index hasbeen in negative territory, indicating that more companies arehaving a hard time getting loans–for small businesses since thefirst quarter of 2008 and for midsize companies since the thirdquarter of 2008.

Rajeev Dhawan, director of the economic forecasting center atGeorgia State University's J. Mack Robinson College of Business,says banks' bad debts, many related to real estate, keep them fromlending freely. “The biggest chunk would be residential, as well ascommercial real estate,” he says.

“The faster we clean up [the bad loans], the faster we get backto normal growth,” Dhawan says. He argues that the U.S. should beable to resolve the problem of banks' bad loans more quickly thanJapan, where the issue resulted in a decade of economic stagnationin the 90s, because the U.S. has a broader range of potentialbuyers. “We allow anyone who can put the money up to buy thestuff,” he says.

Dhawan notes that small companies have less flexibility inobtaining financing than do big companies. “The big corporationscan substitute somewhat,” he says, with other forms of credit, likecommercial paper. “But even when floating commercial paper,companies need the backing of a bank,” he says.