Small businesses still battling for funding, Bank of England data reveals

Business lending fell towards the end of last year as banks continued to squeeze funding to small and medium-sized businesses despite attempts by the Bank of England to boost finance to the sector.

Lending figures from the Bank showed businesses paid back £4.3bn more than they borrowed in the three months to the end of November.

SMEs were the worst affected by the brake on lending, which appears to have persisted despite the Bank tweaking its Funding for Lending scheme last April to favour loans to smaller businesses.

Ministers are likely to be dismayed by the figures, which show a deteriorating trend after net credit contracted by £3.7bn in November alone.

The government has succeeded in persuading banks to increase their lending to the mortgage market, which has rocketed in recent months, but has failed to expand the amount of credit going into the corporate sector.

While large businesses can access the growing market for debt financing in the bond market, small businesses are reliant on high street banks and specialist finance and leasing businesses, which have become conservative in their lending practices since the 2008 crash.

Small firms have consistently reported that credit is either refused or is offered at high prices by the major lenders.

The average net monthly flow of lending was only slightly less negative in 2013 through to November than it had been in 2012.

It came as 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," said the chair of the committee, Margaret Hodge.

"[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."

Howard Archer, chief UK economist at IHS Global Insight, said the Bank of England figures would prove a disappointment to the Treasury and BoE, which have made it their mission to expand the amount of credit going into SMEs for investment.

"The further fall in net lending to businesses came despite the latest Bank of England credit conditions survey reporting a "significant" increase in credit availability to corporates in the fourth quarter of 2013, with a further increase expected in the first quarter of 2014," he said.

"Importantly, credit availability was reported to have increased for smaller companies as well as for larger ones. This increase in credit availability was reported to be due to the improved economic outlook as well as from market share objectives, and competition from capital markets."

He said the situation could improve this year following "clear evidence that firms are now looking to step up their borrowing as markedly improved economic activity in recent months lifts their confidence and need for capital."

Samir Desai, co-founder of peer-to-peer lender Funding Circle pointed out that business lending in total remains a third lower than it was in the first quarter of 2008. Paul Aitken, chief executive of lender borro, said: "It seems that despite continued efforts from policymakers, small businesses remain locked in a battle for capital, so while 2013 was the year of talking about change – let's hope 2014 is the year we see it happen."

He said his own survey of 310 SMEs found that one in five owners said they had missed out on a growth opportunity due to a lack of accessible finance. Two in five SMEs that applied for funds were unsuccessful with a quarter saying they "wouldn't even bother with the bank in the first place".