By Claire West

Amid reports that the Government is getting tough with banks for failing to provide affordable lending to small firms, new research from the Forum of Private Business shows that access to finance is worsening.

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 launched today entitled ‘Financing a Private Sector Recovery' banks could face penalties for failing to boost lending to small businesses.

According to the Forum's latest Economy Watch survey there is ‘significant latent demand' that is not being met by banks, contrary to claims made by several lenders.

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

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

In all, just 1% of respondents said access to finance has improved, compared to 3% in May, and 15% said it has worsened — almost four times the number in May when 4% reported a decline. In addition, 67% have seen no changes in their ability to access to finance.

The majority of the cuts were to overdrafts, with some businesses reporting reductions of more than 50% and even outright cancellations to their overdraft facilities. However, the biggest individual reductions came in the form of rejected loan applications and the withdrawal of credit by factorers.

"Contrary to what some of the banks are saying, some firms are still not able to access the finance they need and both business growth and economic recovery is under threat as a result," said the Forum's Head of Policy Matt Goodman. "According to our members, demand is certainly there but lenders are not providing the funding or the levels of service that they should be. They are telling us that creeping costs and charges are making finance that is available less accessible."

Mr Goodman added: "Our research shows that the Government's green paper is timely in addressing lending as part of its move towards a private-sector-led recovery. As with exploring alternatives to traditional lending, a ‘carrot and stick' approach to encouraging banks to lend is sensible, providing the carrot offers a genuine incentive and the stick is a real deterrent."

The Economy Watch survey's other findings are as follows:

Cost of Finance

At 4.5%, the cost of secured loans remains significantly higher than the 0.5% Bank of England base rate and slightly up compared to the previous survey. Some secured lending applications have been refused.

The average rate for unsecured lending is 11.8% and overdraft lending 5.8%, which is consistent with previous months.

Some small businesses have reported increased bank charges in areas such as credit cards and hire purchase.

Late Payment

Some businesses attempting to access finance via invoice financing were unable to do so because of their customers' late payment.

A total of £351,900 of respondents' capital is tied up in late payment, which is 36.68% of their overall turnover.

Despite it remaining a serious threat to cash flow, late payment has improved slightly because a number of contracts have been paid and some business have seen better debt collection achieve results.

Business Confidence

Overall, over a third (35%) of the small businesses surveyed are ‘confident' or ‘very confident' that their businesses will grow in the coming months. However, 55% are ‘not very confident', ‘pessimistic' or ‘very pessimistic'.

Financial Indicators

The cost of doing business - excluding tax - increased for 51% of respondents fell for just 3% and stayed the same for 46%. The tax burden became worse for 27%, better for 5% and remained unchanged for 68%.

Orders have increased for 43%, fallen for 24% and stayed the same for 33% of the businesses surveyed. Turnover has increased for 36%, decreased for 29% and remained unchanged for 35% while profitability has improved for 31%, deteriorated for 23% and stayed the same for 46% of businesses.

In all, 15% of respondents increased investment in machinery and equipment while 13 cut spending on this and 68% made no change. Further, 23% increased investment in sales and marketing, 10% reduced it and 68% made no change. Spending on staff training increased for just 8%, fell for 11% and remained unchanged for 81%.

Business Priorities and Needs

The proportion of firms experiencing increased energy costs during the past year is 47%. The cost of raw materials has increased for 59% of respondents and transport costs have increased for 58%.

Property costs are up for 26% of respondents, 52% have experienced increased staff costs and 55% increased bank charges. The cost of complying with regulations has increased for 50% of the small businesses surveyed.

When asked what would help their businesses to grow, 26% cited improvements to business and consumer confidence, 18% economic improvements and stability and 15% internal business development.

Business Support

Almost a quarter of businesses surveyed (24%) require support but just 5% believe it is available while 19% are concerned it is unavailable.

Of the businesses seeking support finance is the key area, but 56% fear that the necessary funding is not available to them.

Business Investment

In the month ahead, almost one third of respondents (32%) anticipate making no investment in their businesses while more than half (56%) expect to invest in sales and marketing, 27% in training, 21% in machinery and equipment and 17% in product and process development. Just 8% anticipate upgrading commercial premises.


Employment has increased slightly, with an additional 13 members of staff reversing the trend over previous months of successive reductions in employee numbers. The number of vacancies increased to 71 in July from 39 in May. The number of redundancies also fell to 15 from 21 in May.

Impact of the Emergency Budget

At 34% and 15% respectively, more than double the number of businesses surveyed felt the Budget would lead to fewer opportunities than believe it would increase opportunities. A total of 22% said it would have no impact with the remainder uncertain about the impact the cuts would have on the local business climate.

The Economy Watch survey is provided as part of the Forum's Communications Director business support solution, which has been developed to offer small businesses a voice within national, local and European government.