CHICAGO - Defaults by small and medium-sized U.S. businesses on loans, leases and credit lines to finance capital equipment investment fell for the first time in two years in December, adding to signs of a nascent economic recovery, PayNet Inc reported.

Accounts behind 180 days or more, or in default and unlikely to ever get paid, fell to 0.87 percent of total receivables in December from 0.89 percent in November, according to PayNet, which provides risk-management tools to the commercial lending industry.

The drop snapped a two-year increase in defaults which crept up steadily along with other measures of borrower stress as the economic downturn and the shutdown of the credit markets put the squeeze on businesses.

Accounts in moderate delinquency, or those behind by 30 days or more, fell in December to 4.22 percent from 4.26 percent in November, PayNet said Tuesday.

Accounts 90 days or more behind in payment, or in severe delinquency, fell to 1.34 percent in December from 1.41 percent in November.

The company's Small Business Lending Index, which measures the overall volume of financing, fell just 8.6 percent year-over-year in December, following a downwardly revised 8.4-percent decline in November. They were the first non-double-digit declines in nearly two years.

Still, lending remained well below levels at the onset of the recent recession. And at more than 4 percent, moderate delinquencies on loan payments are running at more than twice the rate typical in better times, said Bill Phelan, PayNet's president and founder.

The headline here is that the recession in this economy is most likely over, but full recovery to pre-recessionary levels is still years away, Phelan said from PayNet's offices in Skokie, Illinois. It will likely be at least another 12 months before delinquencies fall to the pre-recession level of less than 2 percent, he said.

PayNet's data comes one day after the Institute of Supply Management said its closely watched index of national factory activity rose more than expected last month, hitting its highest level since 2004.

The borrowing data suggests one more factor in the recovery: existing borrowers are repaying more loans on time, and lenders are less resistant to extending the credit needed for businesses to invest in capital equipment.

We really do see it as a sea change in demand for borrowing by small business, and in turn an indication of investment, Phelan said, referring to slowdown in the decline in lending in November and December.

PayNet collects real-time loan information, such as originations and delinquencies, from more than 200 leading U.S. capital equipment lenders.

(Editing by Andrew Hay)