PayNet, which tracks commercial financing for millions of North American small and medium-sized businesses, said its Canadian Business Lending Index was up 6 percent in the fourth quarter from the third quarter and up 23 percent year-over-year.

It said the quarterly lending growth was ahead of that south of the border. "The Canadian small- and medium-business market is under steady expansion while the U.S. continues to muddle along," said Anthony Zambon, director of PayNet Canada.

The index rose to a reading of 181, its highest level since the final quarter of 2008, marking a ninth consecutive quarter of growth since the index bottomed out in 2010, and the sixth straight double-digit advance on a year-over-year basis.

The PayNet data contrasts with other reports that have painted a gloomy picture of the Canadian economy late last year, including inflation and retail sales data.

Gross domestic product data due out this Friday is expected to show the economy contracted in December and grew at an annualized pace of just 0.6 percent in the fourth quarter, below the central bank's already reduced forecast of 1 percent.

But Zambon said both the PayNet data, which tracks lending across sectors including manufacturing, retail and transportation, and the activity he has seen are more encouraging.

"These companies have great balance sheets and are ready for expansion," he said, adding that the companies tracked typically have loans outstanding of less than C$2 million.

The commercial lenders include independent finance companies, big banks and nonbank players such as machinery makers, whose loans and leases to customers are secured against the equipment sold.

PayNet's Canadian unit collects data on almost 700,000 loan contracts worth more than US$35.5 billion.

FEWER COMPANIES BEHIND ON PAYMENTS

The PayNet data also showed one type of loan delinquency fell to a record low. Moderate loan delinquencies - defined as those being late by 30 days or more - were down to 0.77 percent in November from 1.01 percent of total loans in September. Before October, that gauge of financial stress had not fallen below 1 percent in the survey's eight-year history.

Severe loans in arrears - those behind more than 90 days - fell as low as 0.27 percent in November. These longer loan delinquencies were the lowest since early 2006.

"A lot of the companies that were having issues during the recessionary time have been cleaned out from their (lenders') portfolios and what remains are pretty great companies," Zambon said.

(Editing by Jeffrey Hodgson; and Peter Galloway)

By Alastair Sharp