Hedge funds are known for playing many roles on Wall Street, but last-resort lender to small businesses that are turned down by banks is hardly one of them.

Yet with the credit crunch pushing many major U.S. banks to set tougher lending standards for small and medium-sized businesses, hedge funds have stepped in.

The money isn’t cheap, with interest rates of 14 percent or more. But small businesses have few places to turn.

“A major void has been created in the marketplace by banks tightening their credit standards and trying to stabilize their balance sheets,” said David Grin, co-founder of Laurus-Valens, a hedge fund with around $1.7 billion under management. “From the investment point of view, this is as good as it gets.”

Laurus-Valens provides loans to public and private companies with average revenues of $30 million to $50 million. The fund charges interest rates of about 10 percent to 11 percent, and takes equity stakes in the companies.

Grin estimates that Laurus-Valens’ lending to small companies is up 50 percent from a year ago.

Small businesses are considered a linchpin of the U.S. economy, forming the backbone of the country’s jobs market and playing a crucial role in creating jobs. According to U.S. Census Bureau data, the United States had 112 million paid employees in 2002. About 56.4 million, or about 50 percent, worked at companies with fewer than 500 employees.

Hedge funds have been lending to small companies for decades. But as they exploded in recent years to become a $2 trillion industry, small business lending has also taken off.

“This kind of product will be attractive to big institutional investors, a lot of whom have done poorly in the fixed income market,” said Ferenc Sanderson, senior hedge fund analyst for Lipper Inc, a unit of Thomson Reuters Corp. “As long as the major banks’ balance sheets have not been completely sanitized, there is a pretty good window of opportunity for hedge funds.”

(Reuters)