In a survey of over 1,400 FSB members, only 18 per cent of businesses have applied for new credit, with 50 per cent of these successful in their application. As the state owned banks have been given new lending targets by the Government the survey also revealed that just over a third of businesses (36%) had their application refused with 12 per cent yet to find out the bank’s decision.

For businesses with existing finance, the survey also showed that 16 per cent had seen an increase in the cost over the last two months. Of these, 44 per cent saw between a two and three per cent rise, but more worryingly 12 per cent saw interest rates hiked anywhere between 10 and 14 per cent, at a time when the base interest rate is at an all time low. Only one per cent of respondents had seen the cost decrease.

The FSB has been critical for some time now, of the banks and their lending criteria and believes that the introduction of the Small Business Credit Adjudicator announced in the Budget will help to ensure small firms are given a fair deal and a right of appeal against decisions made by big banks.

John Walker, National Chairman of the Federation of Small Businesses said:

“Trust needs to be restored between banks, bank managers and business as credit conditions remain tight for small firms. We hope the next government – of whatever hue – will look at the best way to address the issues in the banking system to ensure that the UK has the necessary financing structures to support further economic recovery.”

“Small businesses continue to bear the brunt of the financial crisis and are being penalised with extortionately high interest rates. At any time, not least when the economy is on such a fragile path out of recession, a 10 to 14 per cent increase in costs is highly unreasonable.”

While small businesses contribute a third of the retail banking industry’s net banking income they represents half of its risk-weighted assets, according to the report from Capgemini, UniCredit and the European financial marketing association (Efma).

The report highlighted the challenge faced by banks to improve business development while managing risk for the market.

“To overcome these increased threats, successful retail banks will develop two critical areas: the role of the relationship manager and the credit risk management system,” says Bertrand Lavayssière, Managing Director, Global Financial Services, Capgemini.

“Shifting the role of the relationship manager towards closer client relationships and increased empowerment on credit risk management, paired with the implementation of a complete and effective credit risk management system are the keys to success.”

This follows pressure from the Treasury to increase lending to small firms in return for more than £50billion in state aid handed out to the bank.

The charter include a cap on arrangement fees at 1.5 per cent per annum, a roll over of price overdrafts, as well as two years’ free banking to all start-up firms.

Peter Ibbetson, small business chairman at RBS, said the charter is part of the commitment made to the Treasury, but is ‘not a government-driven initiative’.

‘This is the right thing to do,’ he said. ‘We are trying to respond to what businesses are telling us.’

Ibbetson says 93 per cent of SMEs are currently able to roll over overdrafts at RBS at ‘the same or lower rate’. The average rate on loans is 3.5 per cent to 4 per cent points above the Bank of England base rate (now 0.5 per cent).

The meeting organised by the Federation of Small Businesses (FSB) comes as small business owners express anger at what they say is a lack of support by the region’s lenders.

One North East businessman claims he was asked to stump up security of over £200,000 to borrow £100,000 from his bank and claims he would have to wait over six weeks for the bank to draw up a letter of credit for £20,000 (see panel).

Representatives from most of the region’s high street lenders have agreed to attend the meeting where the FSB will press for “lasting commitments” on lending.

However the region’s banks say they are in the market, and open for business, with one saying it is currently approving 85% of credit applications.

Simon Hanson, FSB North East policy manager, said: “Small businesses will lead the North East economy from downturn to recovery but the banks must do more to help small businesses survive in the current climate and improve the confidence in the economy to achieve this.

“Our members are still reporting problems getting access to credit and finance despite the massive Government stimulus programme and the quantitative easing programme undertaken by the Bank of England.

“We are meeting with the banks to help raise the concerns that small businesses have and understand how more can access finance to help them survive, grow and prosper.

“We will be looking for some lasting commitments from the banks to help take this forward and improve the relationship between small businesses and the banks.”

Regional representatives from Barclays, The Lloyds Banking Group, HSBC and the Royal Bank of Scotland have agreed to attend the meeting this Thursday at the Riverside Ground, Chester-le-Street from 5.30pm to 7.30pm.

RBS has announced that its most experienced business bankers were offering would-be borrowers advice and potential access to loans via a new hotline.

RBS and Lloyds have committed to lend firms and homeowners £39bn this year.

Reports have said the government felt the banks were demanding “unrealistic” interest rates on their business loans.

Both look set to meet mortgage lending targets, but they say targets for small firms are harder to reach because companies are looking to clear debts in the recession.

However the Treasury is understood to believe that the pricing of loans rather than a lack of demand is holding the banks back.

RBS and Lloyds – both part-nationalised – have been told they must meet their obligations, which were a condition of the banks’ taxpayer bail-out.

The group says that the dominant position of the two banks meant that small and medium sized businesses may be effectively forced to bank with them.

After continued struggles from small businesses to get credit on affordable terms, the FSB warns that the lack of competition could mean these problems become the norm.

“The only choice which too many small firms feel they have with banking is ‘take it or leave it’,” says Colin Borland, public affairs manager for the FSB in Scotland.

The FSB believes the Government should encourage smaller players to compete in business banking to ensure that minnows can benefit from a “real choice”.

It is also calling for the introduction of alternative sources of finance and the entry into the market of new players. This might be achieved through the creation of a “Post Bank” via the Post Office network.

The group says that the dominant position of the two banks meant that small and medium sized businesses may be effectively forced to bank with them.

After continued struggles from small businesses to get credit on affordable terms, the FSB warns that the lack of competition could mean these problems become the norm.

“The only choice which too many small firms feel they have with banking is ‘take it or leave it’,” says Colin Borland, public affairs manager for the FSB in Scotland.

The FSB believes the Government should encourage smaller players to compete in business banking to ensure that minnows can benefit from a “real choice”.

It is also calling for the introduction of alternative sources of finance and the entry into the market of new players. This might be achieved through the creation of a “Post Bank” via the Post Office network.

The Forum of Private Business (FPB) said that banks are raising interest rates, demanding personal guarantees and inflicting additional charges before lending to needy businesses.

The statement came in response to the FPBs latest survey, which showed that 2 in 5 members believe the current cost of finance is a ‘very serious’ concern.

According to FPB members, some banks are also demanding that they are covered under the Government’s Enterprise Finance Guarantee (EFG) scheme.

Under the EFG scheme, the Government guarantees lending to viable businesses, allowing them to obtain new loans or refinance existing ones where they might have otherwise struggled.

Stuart Hamilton, an FPB member who runs tool supplier Hamilton Beverstock, commented:

“We ran out of cash at the beginning of the year, like most other businesses. Rather than play the credit game, we approached the bank for extra funding and were told the only way was under the EFG.

“We already had a 50,000 overdraft but they wanted to lump it together with a loan and charge us 2% from nowhere, basically for a facility worth the same amount as we already had.”

FPB spokesman Phil McCabe said that the situation is posing a significant barrier to small businesses, and is leaving some with ‘no alternative but to close their doors’.

The FSB is warning that bank mergers, recapitalisation and schemes targeted at the big banks to stimulate lending as a result of the banking crisis risk stifling choices of finance for small firms – leaving business owners with nowhere to turn if they are refused credit by the major high street lenders.

With a quarter of small firms still struggling to access affordable finance, the FSB believes the power of the financial sector should be challenged to guarantee a fair service for small firms. The FSB proposes:

- Struggling banks should not be sold off to other high street lenders as this would create massive institutions which could stifle competition in the financial sector;

- Alternative sources of finance should be provided locally.

Regional Development Agencies should be restructured to offer loans and Essex County Council’s Bank of Essex model should be replicated around the UK.  The Enterprise Finance Guarantee and funds already allocated from the European Investment Bank could also be offered via these routes.

-  The Post Office should be turned into Post Bank offering support for small firms by utilising the Post Office Network and operating either as a solely state owned bank or as mutual or trustee bank.

- Financial Intermediaries, recently created by the Government, should be actively promoted to viable small businesses unable to access finance.

John Wright, Federation of Small Businesses, National Chairman, commented:

“As the second anniversary of the credit crunch approaches, it is important to consider the impact of the banking crisis and what it means for future relationships with small businesses to avoid getting into a similar situation.

“Despite Government bailouts and interest rates set at a record low, small firms are still finding it tough to access affordable loans and overdrafts from banks. This is compounded by the fact that much of the support provided by the Government is only available through the banks and often this isn’t replicated at branch level.

“The FSB would like to see more alternative sources of finance provided locally such as through Regional Development Agencies, local councils or post offices. This would increase the choice of finance on offer to business owners, thereby enhancing their prospects of survival and helping them play their part in stimulating the economy and getting the UK out of recession and onto a steady recovery.”

“It is very important that each and every bank knows that there is someone looking over their shoulder,” Mr Darling said after the Treasury meeting. “I want to make sure that we have a competitive banking system in this country.”

Darling said there had been improvements in the amount of lending to larger companies and to homebuyers, but a lot more needed to be done to ensure that small and medium-sized businesses received enough finance.

The banks attending the “lending panel” meeting were HSBC, Barclays, Lloyds, RBS, Santander, Nationwide and Standard Chartered.

One large bank called the meeting “constructive” and said there had been “no hectoring” by the government over lending. “The amount of loan applications being approved has only fallen marginally,” said another.