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Small businesses struggling to secure credit

Nervousness over the economy means some businesses are reconsidering expansion plans and those keen to borrow still report that banks are reluctant to lend

Small businesses and start-ups are struggling to secure bank loans and overdrafts, the Bank of England reported on Wednesday (21st Sept).

Those generating cash were building up savings rather than investing in expansion because of fears their overdraft facilities could be withdrawn at short notice.

Shop owners were being particularly badly hit during August, the Bank’s regional agents said, with those businesses securing finance facing “elevated” bank fees and “drawn out” application processes.

The findings prompted Chuka Umunna, the shadow small business minister, to call for the Government to begin talks over tougher bank lending targets, known as Project Merlin, for 2012.

He has written to Business Minister Mark Prisk to ask if negotiations on a new deal have begun, pointing out that net lending - the advance of new borrowing facilities - had fallen for ten of the last 12 months, according to the Bank of England.

“The statistics today show that on the ground, small and medium sized enterprises are still struggling to access finance to grow their businesses,” said Mr Umunna.

“If the Government seeks to replace Project Merlin, the Tory-led Government need to get tough. It is crucial they and the banks learn from the shortcomings of Merlin and provide real support for our SMEs [small and medium sized enterprises].”

A Department for Business spokesman said banks extended £100bn to businesses, including £37bn to small businessses in the first half of the year, which was "encouraging".

"There is no room for complacency and the Government will continue to monitor the banks' performance, and press the banks to ensure that they meet their commitments," he said.

The Bank of England said credit conditions for larger companies continued to ease, particularly for manufacturers, but “increased nervousness about the outlook” had led some to scale back investment pland and switch back to paying down debts.

Consumer goods and defence manufacturers had shown the most noticeable deterioration in activity, the Bank’s agents reported, while domestic construction remained “weak”. Exporter continued to report “relatively robust” growth.

Recruitment plans have also “weakened” with the agents now expecting “only modest job creation over the coming year”.

The findings echo a poll of 10,000 businesses from 10 countries around the world by Sage, the business software group.

It found companies in the UK and the US had become far more pessimistic about their prospects for their respective domestic economies than six months ago. Sage reported that German companies had reported the most significant decline in confidence in the last six months.

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