By Claire West

The Forum of Private Business is responding to the latest figures from the British Bankers’ Association (BBA), which show that lending to the UK’s small firms is in decline.

The banking trade association’s figures indicating that new loans to small firms increased by £75 million between May and June 2010, but year-on-year term lending has decreased by £269 million, compared to June 2009 — when the economy was still in recession.

Average monthly loans have declined by almost half since 2008, when banks lent an average of £991 million to small firms. In 2010, the average monthly loan rate is £564 million.

In addition, overall lending has decreased significantly in 2010 despite small businesses increasing deposits into banks by £2.5 billion over the past four months, according to the BBA.

Matthew Goodman, Head of Policy at the Forum of Private Business said: “Our own research shows that both loans and overdrafts have decreased since the start of June — at a time small businesses need more finance in order to expand.

“The need for finance is only going to increase as the economy grows and as small firms, which must be the catalyst for sustained economic recovery, try to meet renewed demand.”

The Forum's latest Economy Watch survey shows that loan facilities for the 358 members on the member panel declined by £66,000 during the past month, while overdrafts decreased by £34,500.

This deterioration comes despite an anticipated requirement for external finance of £1,057,000 per month, recorded in January 2010.

Recently, the Government’s Business Secretary Vince Cable has hit out as ‘misleading' banks' claims that, despite demand for lending being low, approval rates are high. In a green paper entitled ‘Financing a Private Sector Recovery' banks could face penalties for failing to boost lending to small businesses.

The National Association of Commercial Finance Brokers (NACFB), which is in August publishing its annual survey covering SME finance, said there had been a significant reversal in slight improvements to the availability of finance recorded at the start of the year.

Speaking to the Forum, Chief Executive Adam Tyler said: “Evidence from NACFB commercial finance brokers, both anecdotal as well as from the initial results of our 09/10 survey, taken in conjunction with the Bank of England’s own figures, suggest that credit is still extremely difficult for businesses to access.

“There was certainly a loosening of funding and a slight relaxation of criteria at the beginning of the year — but this closed off again just after the general election, and shows little sign of reopening.

He added: “The Treasury report, ‘Financing a Private Sector Recovery’ states that SMEs are vulnerable due to their reliance on bank finance and the problems this has caused. And the Bank of England’s own ‘Trends in Lending’ report states that ‘the flow of net lending to UK businesses remained negative in May and was more so than in April’ - so let’s not believe the hype here, business conditions are still tough and banks are still reluctant to do deals.”

According to research carried out by the Open University Business School earlier this year, supported by the Finance and Leasing Association, 16% of small and medium-sized businesses needed to replace old equipment or invest in new equipment to expand but were unable to do so, with lack of finance a significant factor. The organisation said that too few businesses are exploring alternatives to traditional bank lending.

“Our findings indicate that some businesses are having difficulties obtaining new equipment. Economic recovery depends on Britain’s small businesses being able to grow and invest,” said the FLA’S Head of Asset Finance Julian Rose.

Mr Goodman added: “With the requirements to recapitalise and the simultaneous pressure to keep up the flow of credit, banks do have their backs against the wall. But the way out of this situation isn’t to clamp down on one side to fix the other. Businesses need the access to finance and expertise that the banks can provide, and the banks need commercially-viable business customers to grow their reserves, so both groups are going to need to find innovative ways of managing lending in this new economy.

“For the banks, that means a closer relationship with clients, understanding their business customers and their finance requirements. For businesses, it means presenting better quality financial information and just as importantly an awareness of alternative forms of finance.”