Alternative lenders fill void as banks ignore small firms. (Wall Street West).

FOR a variety of reasons, large banks have all but abdicated their traditional role as lenders to promising businesses.

It's opened up a niche now being filled by alternative lenders, said Marshall Geller, founder, president and chairman of St. Cloud Capital, a Los Angeles-based Small Business Investment Company.

The economic downturn exacerbated a small business lending problem that was long in the making. A generation of mergers wiped Out many local banks, giving rise to banking behemoths. Even if they wanted to be more aggressive, the big banks have lost many of their veteran loan officers with knowledge of local small businesses. (Ethnic banks have picked up the slack in some areas, such as Los Angeles.)

Federal regulators are now scrutinizing bank loans more stringently, meaning banks might be forced to write down loans that look weak. This deters risk-taking as well.

Result? "Every day, we get calls, four or five calls from businesses that in the past would have borrowed from a bank," said Geller, who started St. Cloud this year.

For every dollar an SBIC lends to a job-creating small business, the government will lend a dollar under a matching formula.

With $80 million under management, Geller so far has extended two loans. One is $2 million to Sweet Factory Inc., an Orange County-based operator of stores selling candy by weight, from loose bins. The loan will be used to help build the franchise to 200 shops from 100.

While bank fecklessness is "hurting the recovery," Geller said he is a beneficiary of the credit crunch. "We are lending money at 12.5 percent, plus we are taking warrants (equity). The internal rate of return could be 25 percent to 30 percent."

Geller expects to ramp up loan volume in months ahead. "It's great for us. We can lend to good companies with good collateral, and make rates of return that mezzanine lenders (high-risk lenders) get."