Small firms hit by lending squeeze

Many small and medium sized enterprises (SMEs) are still struggling to raise money from banks despite an agreement between lenders and the Government, a report revealed today.

Some 12% of SMEs said they had experienced difficulties obtaining finance over the past year, according to a survey by insurance giant RSA and the Warwick Business School.

Amid the squeeze in lending, SMEs are increasingly looking to give away stakes in their companies in return for cash, as a "Dragons' Den mentality" emerges, according to the report.

The problems in raising cash will cause concern because SMEs are seen as the lifeblood of the economy, employing 20 million people, and are at the forefront of the Government's strategy for fuelling growth.

The Treasury earlier this year struck up the Project Merlin agreement with the UK's biggest lenders, which saw them pledge to hit targets for lending to SMEs in 2011.

The latest figures from the banks show they had lent £56.1 billion to small and medium enterprises (SMEs) in the first nine months of 2011, meaning they were on course to narrowly miss their £76 billion full-year target.

Manufacturing firms faced the biggest struggle to raise money, with 15% reporting difficulties. This suggests that the Government's strategy of rebalancing the economy by making more goods is also in jeopardy from the trend.

Tara Kneafsey, a director at RSA, said: "Confidence is a critical factor for SMEs as we approach 2012 - confidence in knowing they are protected should the unexpected happen and confidence in having access to capital to maximise growth opportunities.

"Our research suggests that this investment and support will increasingly be sought from private investors rather than banks in the coming years."

The report also revealed that 32% of SMEs said the economic downturn had a major impact on their business in the past year, while red tape, severe weather and crime caused further problems.

But there was an increased appetite for risk among SMEs as they look to capitalise on new opportunities and the struggles of weaker rivals.

The companies surveyed planned to invest an average of £102,000 to grow their businesses over the next two years.

Ms Kneafsey added: "We believe SMEs are the backbone of the British economy and their success will fuel the nation's economic recovery.

"It is encouraging therefore to see that the spirit of enterprise remains strong with SMEs demonstrating a willingness to take calculated risks in order to boost business prospects."

A Treasury spokesman said: "The Government is doing everything it can to reduce the risk of another credit crunch and improve access to finance for small and medium businesses.

"The Merlin agreement is making the banks lend more to business - the latest results show they have lent 10% more to SMEs compared to last year.

"To complement this, at the Autumn Statement the Chancellor announced that the new National Loan Guarantee Scheme will support up to £20 billion of new loans to smaller companies."

Business and Enterprise Minister Mark Prisk added: "The government is striving to make the UK the best place in the world to start and grow a business. Start-ups and small firms are right at the heart of our economic plan.

"We have already launched new Business Link services to give individuals and businesses support on setting up, starting and growing their business, as well as the Finance Fitness campaign to help SMEs prepare for and access finance.

"This will be followed next year by the launch of Business Coaching for Growth to give high growth potential SMEs access to quality business coaching.

"As part of the Red Tape Challenge we are also cutting the amount of rules and regulations so that businesses can have more freedom to grow.

"By removing unnecessary barriers to growth and providing more finance and mentoring opportunities for SMEs we are creating a positive business environment that will help boost economic growth in the UK."

PA