SMALL companies in suburban Shanghai - which often have trouble surviving because of lack of credit - will soon gain a new funding source.

The city is expected to issue rules this month authorizing the establishment of small loan companies, Li Nianzheng, director of the Shanghai Small-Sized Enterprises (Trade Development) Service Center, told reporters yesterday.

Some companies are already gearing up to begin the business and could start operation within months, said Li, declining to disclose details.

There are more than 300,000 small businesses in Shanghai, and the majority have difficultly obtaining bank loans, Li said.

Nationwide more than 67,000 SMEs closed in the first half of 2008, according to the National Development and Reform Commission.

To address the problem, the China Banking Regulatory Commission and the People's Bank of China in May issued joint rules setting up trial programs for small lenders.

Test runs have taken place in neighboring Zhejiang Province, where small and medium enterprises are a strong part of the economy, and in Chongqing Municipality.

These loan companies, which can't take deposits from the public, have been encouraged to grant credit to rural families and small enterprises.

A single loan can't exceed 5 percent of the lender's total net capital.

The small loan company program follows the central bank's emphasis on generating more lending to rural areas, SMEs and earthquake-hit zones. The central bank will encourage lenders to expand their rural and SME loans by more than last year's increase amount, the central bank said on its Website yesterday. Growth in these loans is also expected to be faster than the banks' average lending growth.

China's central bank last month increased the 2008 lending quotas for banks nationwide by 5 percent and regional lenders by 10 percent to help finance SMEs and businesses in rural areas.