Banks say they are lending to small firms

Small businesses are not bothering to apply for new finance because they assume they'll be turned down. Only one in six small firms has applied for a new facility or renewed an existing one in the past 12 months, according to the British Bankers' Association's (BBA) Business Finance Taskforce, yet three-fifths of loan applicants received their request.

Katja Hall, chief policy director at the CBI, said: "It's concerning that far fewer SMEs [small and medium enterprises] are confident about receiving the funding they apply for over the next quarter than those who actually got what they asked for last year. This shows that banks need to work hard to build stronger relationships with business customers."

Banks have been criticised this year for failing to meet small business lending targets. Under the Project Merlin agreement the main banks agreed to lend £19bn in the first quarter but handed over just £16.8bn. The BBA said: "The picture is complex, with customers concerned about the economic climate less inclined to borrow."

The research revealed that certain types of small firms were less likely to be offered what they wanted, such as those with smaller numbers of employees as well as younger companies. The Federation of Small Businesses (FSB) said the research proved that the smallest firms are still likely to get a rough deal at banks.

John Walker, national chairman of the FSB, said: "The smallest SMEs are losing out, with a third being refused outright when initially applying for new finance. The figure is more than double the bigger SMEs being refused. So the big question is why medium-sized companies are getting a better deal."

Small firms which didn't approach a bank cited four reasons: the current economic climate; discouragement after making an informal inquiry; the cost of borrowing; and the principle of borrowing.