Small companies are increasingly struggling to secure affordable bank loans, according to research that also found these businesses are carrying an additional £36bn of debt compared to before the coronavirus crisis.

The Federation of Small Businesses, a lobby group for the UK’s smallest companies, said a survey of members found that successful applications for bank loans and other financing had dropped “precipitously”.

Less than half of applications were successful in the third quarter of 2022, compared to nearly two in three before Covid, said the FSB in a report.

The lobby group found the smaller a business was, the less likely its request for a bank loan was to be approved.

Interest rates on loans offered to small companies have been rising, as the Bank of England tightens monetary policy in response to high inflation. Nearly a third of small businesses that applied for finance in the third quarter were offered an interest rate of 10 per cent or more.

“As a country, we cannot afford to have a repeat of the post-crisis credit crunch scenario, where the dreams of thousands of entrepreneurs and business owners were crushed by a withdrawal of finance options, leaving them unable to continue, and deepening the UK’s economic woes,” said Martin McTague, FSB national chair.

“Many small firms now are in a highly precarious position, carrying debts from the pandemic, with the Bank of England raising the base rate, and with funding options getting scarcer and costlier.”

Three in 10 companies told the FSB in its survey that they thought unfair clauses and provisions were included in applications for bank loans and other financing.

The FSB report comes as small businesses worry about how to repay or refinance the large amount of debt they accumulated to survive the pandemic, when many companies took on loans for the first time.

Small and medium-sized enterprises were carrying about £203bn of debt in September 2022, compared to £167bn in January 2020, just prior to the pandemic, according to FSB analysis of BoE data.

The federation raised concerns that lenders could withdraw from the market for catering to small business, as happened after the 2007 financial crisis.

It said this would affect any economic recovery after a recession expected to last through 2023.

Two-thirds of small companies plan to make some form of investment in their businesses by 2024, according to the FSB survey, but under half said they were fully aware of the different types of financing available.

The lobby group has set out recommendations to improve funding and investment for small companies.

The FSB is asking the government to reverse a recent cut to tax credits for research and development, and to introduce a value added tax-based incentive for capital investment.

It is also calling for the state-owned British Business Bank to encourage use of the government’s bank referral scheme, under which lenders are required to share details of SMEs they reject for financing so those businesses can be approached by alternative providers.

The FSB said the Business Banking Resolution Service, a non-profit organisation helping small companies resolve disputes with their banks, needed to address outstanding cases and clear its backlog. The deadline for finalising historic cases also had to be extended beyond February 2023, it added.

The FSB recommended the government expand other state-backed finance schemes open to small businesses, such as the Seed Enterprise Investment Scheme.

It said: “Given the recent economic turmoil of the pandemic, Russia’s invasion of Ukraine, the stagnating of the economy, and inflationary pressures, there is a risk that the UK financial market may begin squeezing lending to small businesses, reminiscent of the period following the 2008 financial crash.”

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