The Federation of Small Businesses (FSB) has urged a radical reform of the banking system to give small businesses a fair crack of the whip at securing finance.

The call has come in response to an interim report from the Independent Commission on Banking (ICB) which suggested that there is subdued demand from small enterprises for loans from high street banks.

While acknowledging that the ICB report and recent figures from the Bank of England, showing that lending to small businesses fell by £1.8 billion recently, seem to indicate a drop in loan requests from smaller firms, the FSB countered with findings from its own latest Voice of Small Business survey. This, the FSB claimed, indicated that large numbers of firms are being refused loans and credit by the major banks, debunking the idea that demand for credit is actually low.

In the last 12 months, 20 per cent of respondents to the survey have approached the banks for credit. Of those, a third were turned down: the equivalent of 320,000 businesses in the last year that have been denied credit. One third of those that applied for credit wanted to use the finance to cover cash-flow; 21 per cent needed the money to purchase machinery and equipment; and 17 per cent to expand their business. Of those who were refused credit around a quarter were told it was because of insufficient security whereas another 16% were given no explanation at all.

As a result of failing to secure sufficient funding, 40 per cent of respondents have reported ongoing financial concerns, the FSB said, while almost a third have missed a growth opportunity, one in five have delayed their investment plans and 18 per cent believe they are at a competitive disadvantage. 

The FSB pointed to the figures as proof that small business demand for finance has not altered for some time. The ICB is due to submit its recommendations on changes to the banking sector to the government this autumn. The FSB wants a radical overhaul of the entire system to make it fairer for small enterprises.

One way of increasing the amount of credit available to small firms would be to create greater competition among finance providers. John Walker, the FSB's National Chairman, commented: "Experience shows that demand for credit is at its highest when the economy starts to enter a recovery period. Our survey work is indicating that businesses are starting to think about expanding or buying new machinery and it is really disappointing that firms are having to abandon these plans because of the banks refusing to lend. The Office for Budget Responsibility is forecasting that business investment will help to strengthen the recovery. This will not happen unless the banks work with businesses to ensure that they can get the finance they so greatly need. If this does not to happen we risk the recovery remaining in a stagnant position and never fully recovering."

Photo: John Walker, FSB's national Chairman.