Credit crunch is continuing for UK's small businesses

British firms are still being starved of credit by banks, research from the Bank of England confirmed yesterday.

The Bank's latest Trends in Lending report said that the stock of lending to all UK businesses fell by £3bn in the three months to May, with small and medium-size enterprises (SMEs) especially hard hit.

Net lending to small businesses has been negative for the past year as repayments outstrip new loans, the figures showed.

Bigger firms are finding it easier to borrow as they can raise funds from capital markets, but net lending to larger businesses was still down in three of the past four quarters.

The survey also showed that the price of borrowing has continued to rise for many, despite the Bank's policy interest rates being held at historic lows of 0.5 per cent.

It said the spread over bank rate for many floating rate mortgages has risen over the past six months. The spread paid by small and medium-sized businesses also went up this year.

The Bank and the Treasury have launched a "Funding for Lending" scheme, which will allow banks to borrow from Threadneedle Street at below market rates, as long as they boost lending to business.

The more they lend, the cheaper the funds on offer will be.

The new scheme is designed to prevent banks from passing on their own rising borrowing costs to ordinary customers. Banks have claimed that they have not been lending because demand from businesses for new credit has been weak.

|However, some experts have accused them of intimidating borrowers away with high charges and unreasonable terms. The former Liberal Democrat Treasury spokesman Lord Oakeshott said: "There will be no green shoots of recovery as long as Britain's banks keep the lending taps turned off. It's time the Treasury made the banks we own — and above all RBS, the real villain of non-lending — change their scorched earth policy or change their bosses."

The net lending figures on household borrowing were flat, with mortgage approvals unchanged over the past three months. Consumer credit flows grew by £700m in May, with the annual rate unchanged.

The write-off rate on consumer credit fell in the first quarter of the year, but remained high compared to the rates seen in the recession of the early 1990s.