By Max Clarke

A prominent small business organisation has said that a new £2.5 billion equity fund earmarked for medium sized businesses turning over between £10-£100 million, will not address the dire funding needs of Britain’s smaller businesses.

"The Business Growth Fund aims to bridge the clear gap in funding for ‘high growth' firms identified in the Rowlands Review back in 2009 and so is certainly a welcome step and one that is long overdue," said the Forum for Private Business's Senior Policy Adviser Alex Jackman.

"But we cannot allow this to overshadow the real problem — the lack of affordable lending being made available by banks to start-ups and other small businesses - those that are not eligible to benefit from the fund. There is a real danger that these firms will be left behind and that would be disastrous for the economy."

The Forum is calling for better access to finance as part of its Get Britain Trading campaign. Proposals include ensuring banks have better regional infrastructures and more localised lending powers, stricter timelines on lending decisions and greater transparency by both banks and businesses.

Mr Jackman added: "We need much better debt finance in the form of cost-effective lending in parallel to this kind of equity investment. So far efforts to make this happen - such as a lending code that is not binding, targets that many banks are simply not meeting and mentoring and appeals schemes of unproven merit - are just not enough."

Under the Business Growth Fund the banks are committing to provide £1 billion of equity capital over three years and £1.5 billion over ten years.

Conceived as part of the BBA's taskforce last autumn, the fund was central to the Project Merlin deal struck between the Government and major banks. The deal included an increase in lending to SME and restraint on bank bonuses.

It followed the Rowlands Growth Capital Review which in November 2009 found a significant shortfall in growth funding for firms seeking £2-10 million. The review emerged from the former government's 'New industry, New Jobs' strategic plan for Britain's recovery.