Despite attempts by the Bank of England to boost finance, business-lending fell towards the end of last year as banks continued to squeeze funding to SMEs.
Lending figures from the Bank of England show that businesses paid back £4.3 billion more than they borrowed in the three months to the end of November.
The worst affected by the brake on lending were small businesses. This trend has persisted despite the Bank adapting its Funding for Lending scheme last April in favour of smaller businesses.
Government Ministers are likely to be disappointed by the figures which show a deteriorating trend after next credit contracted by £3.7 billion in November.
Banks have increased their lending in the mortgage market, which has rocketed recently, but it appears they have failed to expand the credit going into the corporate sector.
Large companies have access to the growing market for debt financing in the bond market, while small businesses are limited to and often reliant on the high street banks, which from the 2008 crash have become more conservative with lending.
Small firms consistently report credit is either refused or offered at high prices.
The average net monthly flow of lending was only slightly less negative in 2013 through to November than it had been in 2012.
The public accounts committee of MPs criticised Government departments for running a series of ad hoc schemes to boost lending but failing to build them into a coherent plan.
‘There is no common understanding about which parts of the SME sector are generating the most growth and where government support would do most good,’ the chair of the committee, Margaret Hodge, told the Guardian newspaper.
‘[The business department] intends to give nearly £3 billion of financial support to SMEs between 2011-12 and 2014-15 through its six main schemes. It helped nearly 6,000 firms during the last financial year, but more could have been helped if the department had done more to ensure that SMEs are aware of the potential financing options available to them.’
Many SME owners are now seeking alternative forms of funding such as crowdfunding, pension funding and trade credit from suppliers, instead of relying on the bank. This has sparked a growth in the popularity of alternative funding.