The Forum of Private Business has said data released in today’s BDRC Finance Monitor for SME lending highlights ongoing problems with business banking in the UK.

The research has shown particular issues for first time applicants, who are finding it increasingly difficult to source credit. The BDRC research shows more than half (54%) of first time applicants for a loan or overdraft ended the process unsuccessfully. This compared with 21% for non-first time applicants seeking new or renewed facilities and 8% for those renewing an existing facility over the past three years.

The figures show a significant drop in approval rates for first time applicants, which in 2010 just 42%. The Monitor data shows a sizeable increase in personal cash used to finance a business venture, as all those stone companies using personal credit cards to buy their materails will be well aware. Now, 34% of companies say they are using personal credit to purchase goods – and not through choice – which is 9% more than two years ago.

Forum spokesman Robert Downes says: “The long and short of it is that in 2012 firms seeking credit for the first time – usually the ones who need it most – are the ones more often than not being refused access to credit from lenders. And it’s got markedly worse in a short period.

“Simply put, the banks' risk-averse nature is stifling the next generation of business owners – and the government is idly watching from the sidelines.

“Unfortunately, these results come as no surprise following the dreadful Funding for Lending figures earlier this week [click here for more on Funding for Lending] and shows the desperate state of small business lending at the minute.

"It also shows government must look at radical action to get banks lending or we’ll never get out of the hole we’re in.”

The Forum was also critical of the overwhelming lack of awareness among businesses of the loan appeals system identified in the Monitor’s findings.

Only 14% of failed overdraft applicants and just 8% of unsuccessful loan applicants were even aware of the appeals system introduced in April 2011. Two thirds rated the banks’ feedback for why they were refused loans as poor.

“It is not good enough that two years after the appeals system was brought in only 10% of businesses turned down for bank finance say they are aware of it,” says Robert Downes.

“Such lack of awareness is a huge failure by anyone’s standards. That the banks are implicated again when it comes to a form of self-regulation speaks volumes about the self-serving culture in the sector.

“Just how many firms have been let down as a result? We’ll never know the answer, but this has to be a priority for lenders now – and if they aren’t capable, government must step in.

“There’s a good case for an opt-out system here, so businesses would automatically enter an appeal unless they chose not to. Whatever the answer, the status quo is clearly not sufficient.”

But the Monitor suggests not all the blame can be put at the foot of the banks and the Forum points out that more than a third of SMEs who wanted an overdraft felt discouraged because they thought the answer would be no, although the reality is that banks are approving seven out of 10 applications.

“Clearly there’s a fear out there that the banks will automatically say no, and while this might be the case for first time applicants, it is not the case for more established businesses,” says Robert Downes.

“We also need to see a bit of encouragement for SMEs to get out there and apply for finance, particularly with it being cheaper than it has been for quite a while due to the Funding for Lending Scheme.

“All that said, the banks have no-one else but themselves to blame for these negative attitudes. They’ve hardly been the friend of small business for quite some time now.”