Pietro Fattorini said he filed for bankruptcy protection after his bank cut credit lines, choking off funds his marble company needed to survive. Nadia Shira Cohen for The Wall Street Journal

“It’s like starting to drive on the motorway without knowing if you’ll find gas stations on the way,” he said.

The woes of smaller banks like Banca Marche are washing over the millions of small Italian businesses that depend on them for financing. Moreover, the deep ties the banks have to Italy‘s small towns mean that the consequent losses in banking jobs, share prices and even charitable donations weigh heavily on some local communities.

A man packs marble tiles at Pietro Fattorini‘s factory in Senigallia, in central Italy. Nadia Shira Cohen for The Wall Street Journal.

Small and midtier banks like Banca Marche account for about half of overall lending in the country. In turn, Italian companies rely on banks for about 70% of their funding, more than double the rate in the U.K. or U.S., according to Bank of Italy data.

Banca Marche declined to comment.

A man packs marble tiles at Pietro Fattorini’s factory in Senigallia, in central Italy. Nadia Shira Cohen for The Wall Street Journal

In a statement in August on its first-half results, the bank said it was working to reduce the risk attached to its loan portfolio and that the decline in lending was mainly due to the difficult macroeconomic environment and the consequent lower demand by companies.

In recent months, the Bank of Italy, concerned about soaring rates of bad loans amid Italy’s worst recession since World War II, placed 13 banks under “special administration,” a process whereby the central bank appoints commissioners to run troubled lenders. A Bank of Italy spokeswoman said the commissioners are involved in lending decisions, though she denied there is any link between special administration and a reduction in credit to small and medium-size firms.

“The only financing possibility for Marche’s companies—around 95% of them are [small and medium-size enterprises]—is self-financing or credit,” said Donato Iacobucci, an economist who works at the Università Politecnica of Marche.

The Bank of Italy spokeswoman said the central bank doesn’t require a lender under special administration to rein in lending. “For sure, the presence of the commissioners ensures that credit is granted on the basis of a correct evaluation of the creditworthiness of borrowers,” the spokeswoman said.

Bad loans in Italy have risen 35% since the end of 2011, while lending to Italian companies has fallen 5% during the same period, banking association ABI said. Italian bank loans declined 3.7%, to €1.857 trillion, in the first 10 months of this year, compared with a 1% drop in the same period last year.

The credit crunch has weighed particularly heavily on small companies, which make up more than 90% of all firms in Italy and typically lack other sources of funding, such as selling bonds to investors. Lack of credit is proving the coup de grace for many Italian companies that are already suffering a slump in demand.

Bankruptcies in Italy are at a 10-year peak, with more than 62,000 Italian companies going bust in the first nine months of this year, according to research company Cerved, a 7.3% increase from the same period in 2012 and a 57% rise from 10 years earlier.

Banca Monte dei Paschi di Siena SpA, which has lost €8.5 billion in the past three years, has become the poster child of the domino effect a bank’s troubles have on a local community. The bank, once a major employer and the leading lender in its home region of Siena, is cutting thousands of jobs, trimming lending and reining in spending on local groups.

A similar situation is unfolding in Marche, a region once known for its vibrant shoe and furniture industries.

Banca Marche was once the region’s leading lender, with one-fourth of all loans, but many of its small-business clients started struggling to repay loans, especially those in the real-estate sector. Bankruptcies among companies in Marche rose 9.3% in the first nine months of this year, compared with the same period last year, according to Cerved. In response, Banca Marche has cut the total amount of loans 12% since 2011.

For years, Banca Marche extended an €800,000 credit line to Mr. Fattorini, secured by his invoices. But while his company’s revenue has increased 20% since 2008, the bank cut that the credit line to €150,000, demanded collateral and added a commission for the first time. That pushed the 47-year-old entrepreneur into bankruptcy protection in September.

“I don’t know what I’ll do” once the company is wound down, he said. “Maybe I’ll go abroad.”

Claudio Mercorelli, who manages a furniture manufacturer in Marche, also stopped receiving credit lines from Banca Marche he relies on for working capital. “We can’t go on working like this. What’s worse is that when you speak to the banks they don’t give you any explanation. They say these are the orders they received,” he said. He is now scrambling to find other banks that can finance his company.

The banks’ problems are spreading in other ways as well. Cassa di Risparmio di Ferrara SpA, which came under special administration by the Bank of Italy in May, stopped paying a dividend to its controlling shareholder, charitable foundation Fondazione Carife, in 2010. The dividend allowed the foundation to spend about €75 million over the previous decade on local projects, ranging from church restorations to the creation of a new economics department at the Università di Ferrara.

But the foundation depleted most of its reserves to underwrite a 2008 capital increase launched by the bank. Now, with the dividend also suspended, the foundation’s charitable giving has dried up, with grants declining from €7.6 million in 2008 to €1.9 million in 2012.

Meanwhile, people who piled into shares offered by Banca Popolare di Spoleto SpA could lose a lifetime of savings after the stock plunged 63% in the past three years.

The bank had pushed the shares to customers, as did Cassa di Risparmio di Ferrara.

Consumer association Federconsumatori has fielded hundreds of complaints from small shareholders, claiming they weren’t properly informed about the risk of such investments.

The association is considering whether to take legal action against Cassa di Risparmio di Ferrara after a 75% drop in the stock since January. Cassa di Risparmio di Ferrara and Banca Popolare di Spoleto didn’t reply to requests for comment.