Lending to small firms 'falls 10 per cent'

The amount of new lending to Britain's small businesses fell 10% in the first six months of this year, banking industry figures have shown.

New loans for firms with a turnover of £1 million or less totalled £3 billion in the period - equivalent to a monthly average of £506 million, according to the British Bankers' Association (BBA). This compares with £3.4 billion lent in the same period a year ago.

The data will fuel pressure on the banking industry, which has pledged to increase the availability of credit to small and medium sized businesses in its Project Merlin agreement with the Government.

The Bank of England said previously there was evidence companies found it difficult to gain access to credit in September and that when loans were available, fees were high and the application process was often drawn out.

Firms were also hoarding cash reserves rather than investing their money amid fears that their overdraft facilities could be withdrawn at short notice, the Bank added.

The BBA said overall net lending had contracted by about £332 million a month in the first half of 2011 as businesses paid off their debts amid fears the economy could slip back into recession.

The trend has helped small business deposits rise to a record £58 billion.

BBA statistics director David Dooks said: "This reflects the appetite of small businesses to pay down their borrowings and, in an uncertain environment, with trading confidence fragile, build up cash reserves."

The Bank of England's report, which is based on interviews with bosses, agreed with the BBA, but added that small firms were still finding it difficult to get loans, with sectors that were being hit by weak consumer demand, such as retail, particularly badly affected.

The BBA said banks had 17 commitments to help small businesses under the Better Business Finance initiative, including a newly-established code of principles for lending; an independently-monitored appeals mechanism; free business assistance through a UK-wide mentoring network, and the Business Growth Fund to help growth businesses bridge the equity gap.

A spokesman added: "Banks are at the table and ready to make the necessary changes to increase business confidence by freely giving them the help they need to get their financial applications right."

John Walker, chairman of the Federation of Small Businesses, said: "The figures speak for themselves - no matter what the banks say, small businesses just aren't getting the funds they need.

"It is vital that the Independent Commission on Banking's recommendations to improve competition are implemented within this Parliament and a new specialist bank for small businesses is created to ensure that small firms can get the finance they need to lead the recovery."

He added that, in the 12 months to June, a third of small firms which applied for finance did not get the credit they needed and 31% of those have "missed their growth opportunity" as a result.

One in five small businesses believe they are at a competitive disadvantage, he claimed.

A Department for Business spokesman said: "The Government wants to see the banks working hard to improve their relationships with small business.

"What is really important is to see a substantial rise in the quantity of lending that banks make available to small businesses, as set out in the Merlin agreement.

"We must see significant improvement over the next few months. We are monitoring the banks' performance extremely closely and if they fail to meet the commitments they have agreed, we will examine options for further action."