CHICAGO - Small U.S. businesses boosted borrowing in January for the third straight month, although lending remains well below levels at the start of the recession, and delinquencies rose, PayNet Inc reported on Tuesday.

The company's Small Business Lending Index, which measures the overall volume of financing, rose a seasonally adjusted 4 percent in January, month-on-month, after advancing on a seasonally adjusted basis in November and December, PayNet said.

The index fell just 3 percent in January from a year earlier, the smallest decline since the onset of the recent recession, following a downwardly revised 10-percent decline in December.

There's been a lot of damage done, but at least we are moving in the right direction, said Bill Phelan, PayNet's president and founder. It's a positive improving story that points us toward a recovery in the small business economy.

Still, he said, the January index reading of 80.8 was 39 percent below its pre-recession peak.

Meanwhile, moderate delinquencies on loan payments rose to the highest since the recession began, and lenders will likely see defaults at elevated levels for the next 12 months, Phelan said.

Trends in loan defaults tend to lag other economic indicators, Phelan said.

We really see it as an aftershock of the recession, he said.

Accounts behind 180 days or more, or in default and unlikely to ever get paid, rose to 0.92 percent of total receivables in January from 0.89 percent in December, according to PayNet, which provides risk-management tools to the commercial lending industry.

Accounts in moderate delinquency, or those behind by 30 days or more, rose in January to 4.39 percent from 4.31 percent in December, PayNet said Tuesday.

Accounts 90 days or more behind in payment, or in severe delinquency, rose to 1.38 percent in January from 1.37 percent in December.

These credit problems are going to linger on and be at elevated levels for the next 12 months, Phelan said.

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)