Bank squeeze hits as SME confidence falls

The Federation of Small Businesses (FSB) latest ‘Voice of Small Business' Index – its quarterly survey of confidence among UK small business – suggests big banks have tightened their purse strings once again. Four in 10 small firms applying for credit are refused.

Confidence among Britain’s small businesses has fallen in every industry sector except those working in health and motor services, while the largest drop in confidence over the quarter was in the property and financial services sectors, both critical to London’s fortunes.

As a result of this, confidence of London's firms is now on a par with Northern Ireland, while firms in eastern counties and the north east show renewed optimism. Despite pressures, confidence just remains in positive territory at +1.3, down 0.9 points.

More than four in 10 (41 percent) small firms were refused finance from high street banks as confidence dipped in the second quarter. With the economy in recession, the FSB's Small Business Index measured 1.3, down 0.9 points from 2.2 in Q1 as firms continued to feel pressure from rising overheads.

Despite the credit squeeze, more than 50 per cent of respondents said they still plan to grow their businesses over the coming 12 months. But the proportion of firms looking to grow rapidly shrank from 10.9 per cent in Q1 to 7.2 per cent in Q2.

With one in five firms saying access to finance is the main barrier to achieving growth aspirations, the FSB believes the credit squeeze will impair small businesses' growth plans, reduce new job creation and further set back the UK's struggle to emerge from recession.

The FSB has long called for more competition in the banking sector and strongly believes that small firms – which collectively produce more than half Britain's wealth (GDP) – will only be able to access the reasonably-priced finance they need when there is more competition in the banking sector.

John Walker, National Chairman, Federation of Small Businesses, said: "If small firms cannot access credit it constrains their investment plans. We know from past research that many small businesses missed growth opportunities because they couldn't access the money they needed. There needs to be more competition in the finance and banking sector because only when there are more options to choose from will small firms get a fairer deal. There also needs to be more alternative sources of finance that small firms can tap into.

"This ongoing credit squeeze is becoming critical. Government is relying on small business growth to drag the UK out of recession. The will of small businesses to grow is there but the money to enable them to do so is not.

"Unless this situation is addressed effectively and rapidly, that confidence might evaporate altogether, with dire consequences for the economy. A further issue is that with 63 percent of small firms saying that fuel is the main upwards driver of business costs, we urge the Chancellor to cancel the planned 3p rise in duty for August."