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Small firms still feeling the squeeze on credit

Business lending shrank for the fifth month running, a new report from the Bank of England has revealed.

According to the Bank's latest Trends in Lending report, net business loan repayments in July were £2.5 billion.

The figure was an improvement on the £3.2 billion recorded in June, but the Bank said that lending by the UK's major credit providers has stayed moderate in August.

The picture is not uniform. Credit conditions for larger companies were showing signs of easing, but smaller businesses were still struggling to secure finance.

Although many firms have been seeking to pay down debts in the aftermath of the recession, smaller enterprises have fewer funding options open to them than their larger counterparts.

The report said: "Contacts of the Bank's network of agents noted that while credit conditions were easing for larger businesses, they remained tight for smaller firms."

New lending facilities for SMEs have remained unchanged over recent months.

Despite the £200 billion of quantitative easing with which the Bank of England has been priming the economy, the broad money supply declined by 0.2 per cent in August compared with the previous month. The annual rate of growth in money was down by 1.8 per cent.

It had been hoped the quantitative easing programme would make more funds available for credit-starved small businesses.

One analyst, Howard Archer of HIS Global Insight, argued that the case was strengthening for a return to quantitative easing.

He said that the Trends in Lending survey highlighted concerns that tight credit conditions are still posing a significant obstacle to economic activity, even when subdued demand for credit among businesses was taken into account.