GUO Duanzhuang, 55, is finding it no easy task to make money as a small businessman even as Shanghai's economy thrives.

The owner of a construction business that employs more than 10 workers said rising labor costs, a lackluster order book and uncertain global conditions are creating hard times.

"We don't see a recovery though it's said the global financial crisis is waning," said Guo, who has been in construction for two decades. "As for financing, I am forced to turn to friends or relatives because it's too difficult to get bank loans."

His company offers construction services and related equipment to ports.

Still, Guo counts himself lucky. His business is still operating while many other small business firms - especially those heavily reliant on exports - have folded.

Times have been particularly tough in Zhejiang and Jiangsu provinces, which flank Shanghai. There is no official data released on the number of business failures in either province, but the Xinhua news agency has reported that three major private companies in the Wenzhou City in Zhejiang have gone bust.

"We have heard that current conditions now for small business may be even harsher than they were during the global financial crisis," said one small-business veteran who declined to be identified. "The tight monetary policy makes it more difficult to borrow money."

To prevent small firms from going bust in Shanghai, the city government has pulled out all the stops to open new financing channels for its 300,000-plus small business firms, including subsidies, support from insurers to cover loans and the creation of small-loan credit agencies.

Offer of subsidies

Earlier this month, the Shanghai government announced 3 billion yuan (US$469 million) of subsidies for small business, especially those involved in technology.

"The 3 billion yuan is expected to leverage at least 30 billion yuan of capital to address underfunded companies' need for financing," said Jiang Zhuoqing, deputy secretary general of the Shanghai government and head of the Shanghai Finance Bureau.

Shanghai Party Secretary Yu Zhengsheng and Shanghai Mayor Han Zheng held meetings in August to discuss financial support for the city's small business.

The Shanghai Financial Services Office, a body that oversees the financial industry, is at the forefront of offering aid to small enterprises.

"Some bankers have asked why a global financial hub like Shanghai should worry so much about small enterprises when we should be focused, they think, on attracting big-name companies," said an official at the office.

The reason should be obvious, he said.

"Small companies are not big taxpayers, but we all know that small enterprises are big job-creators," he said. "We don't want them to sink just because they lack financing."

He said many of them lack the collateral needed to secure bank loans, especially as the central government cracks down on excess liquidity, inflation and asset bubbles.

In the city, because nearly 90 percent of small- and medium-sized business lack any credit track record, they have to rely on their own cash flow, help from relatives or money through black market channels.

To encourage more banks to offer credit to small business, Shanghai has introduced a program under which insurers cover loans for small companies. If a borrower defaults, the losses are borne by the insurer, the government and the lender.

Shanghai-based China Pacific Insurance Co, the country's third largest insurer, was the first insurance firm to sign up for the program.

"We joined more out of a sense of social responsibility rather than any desire to make money," said Chen Wenkang, deputy manager of the property and casualty insurance at the Shanghai branch of China Pacific Insurance.

To make sure that the new program runs smoothly, the Science and Technology Commission of Shanghai is recommending quality high-tech firms to banks and insurers.

Confidence boost

"Their recommendation gives us confidence in the quality of small business and saves us a lot of work investigating the creditworthiness of companies in the program," Chen said.

The insurer has, so far, offered coverage for loans totaling 450 million yuan from the Agricultural Bank of China, the Bank of Shanghai and the Shanghai Pudong Development Bank. The loans went to 147 smaller companies, mostly in the technology sector.

If defaults occur, the insurer absorbs 45 percent of losses, the government up to 5 percent and the banks take the remainder. Since the loans are of one-year duration, there have been no defaults to date. Interest rates on the projects vary.

The total insurance coverage for small business loans may top 1 billion yuan by the end of this year.

But it's still a drop in the bucket.

By the end of July, outstanding loans to small business in Shanghai totaled 651.9 billion yuan. That was up 9 percent, or 53.3 billion yuan, from the start of the year, a faster pace than the 7.5 percent average loan growth because China's banking authority had ordered banks to offer loans quickly to small business. But advocates of small business argued it wasn't enough.

Besides bank loans, Shanghai is also encouraging private investors to set up credit companies specializing in loans to small business. These companies aren't allowed to take deposits.

"We are open to investors who are interested in the sector, whether from overseas or out-of-town," said Liu Xiaokun, an official with the Shanghai Financial Services Office.

Investors from Hong Kong and the provinces of Hainan, Zhejiang and Jiangsu have led the way in setting up small-loan credit companies in Shanghai, he said.

Financial relief

Loans issued by those companies generally are short term, averaging seven months, and carry average interest rates of 17 percent. Credit terms are generally more flexible than those offered by banks.

By the end of July, the city had approved licenses for 69 small-loan credit companies, and 64 have already started operating. The companies have granted more than 15,000 loans worth over 30 billion yuan. So far, all the companies are profitable, according to the Shanghai financial office.

Shanghai expects more than 100 small-loan credit companies to be operating in the city at the end of this year, with aggregate credit valued at 35 billion yuan.

Meanwhile, the city is hiring accountants to offer auditing help to small enterprises that lack the expertise to maintain records necessary to obtain loans.

Despite the city government's help for small business, Guo said he feels no relief at all.

"More or less, the policies are inclined toward high-tech companies as Shanghai cuts its exposure to manufacturing and traditional industries," Guo said. "We feel left out in the cold."