WASHINGTON – Lending to small businesses fell in the third quarter, showing the companies that account for more than half of total job creation are still struggling to emerge from the recession.

Net borrowing by non-financial, non-corporate businesses shrank by $162.7 billion at an annual rate from July through September, the seventh consecutive quarterly decrease, according to the Federal Reserve’s Flow of Funds report released Thursday. But it was the smallest drop of the contraction in lending that began in the first three months of 2009.

Small companies are “still hurting and working toward healing and not borrowing,” said Julia Coronado, chief economist for North America at BNP Paribas in New York, who worked on the report as a Fed economist. “They’re paying down bank loans, they’re paying down mortgages.”

Sales expectations at small businesses turned positive for the first time in five months in October, according to a survey last month by the National Federation of Independent Business, indicating firms may begin expanding in coming months. At the same time, the value of their assets has fallen, making it harder to qualify for loans, Coronado said.

Fed Chairman Ben Bernanke has said these companies account for 60 percent of job creation, meaning bigger payroll gains and lower unemployment hinge on their willingness and ability to spend.