As small businesses search desperately for credit to ride out the recession, trade bodies say that banks are still not lending and are imposing increasingly high charges on business accounts.

Phil Orford, of the Forum of Private Business (FPB), says: “With the economy in recession, business owners are struggling to maintain any kind of cashflow because of credit restrictions, spiralling late payments and falling sales.”

With 120 small businesses closing every day, Times Money examines what the Government is doing to help - and suggests some alternative sources of finance for entrepreneurs.

The Enterprise Finance Guarantee (EFG)

The EFG scheme was unveiled by the Government in January to provide £1.3 billion of loans to small businesses. The loans, which are worth up to £1 million each, are administered by banks, but are 75 per cent underwritten by the Treasury.

The scheme will run until March 2010 and can be used to provide new loans, refinance existing ones or convert an overdraft into a loan to free up cashflow. The Government says that 1,900 loans, worth almost £211 million, are “being processed” through the system. But many businesses say that banks still do not understand how it works.

Stephen Alambritis, of the Federation of Small Businesses (FSB), says: “Getting EFG implemented is a tortuous process. In January and February the banks were clueless about the scheme and simply turned customers away. Now it is starting to pick up, but some banks are charging businesses high arrangement and review fees to access the scheme. There is also confusion over whether or not banks can demand that the loans are secured against the business owner's property.”

Ken Jones, of Advanced Aluminium Design Ltd, a small business based in Suffolk, applied for a £50,000 EFG loan through Bank of Scotland in January. He says: “First, we were told that no securities would be required. But after our application was accepted, the bank said that I must secure the loan against my house and pay about £2,000 in survey and valuation fees, as well as a £2,000 set-up charge.

“I had banked there for five years and the account was run impeccably. I declined the loan and transferred my account to another bank.”

Besides the banks, 26 other lenders are providing access to the EFG scheme in specific locations. These include the Business Enterprise Fund, which provides funding in Bradford, Leeds and West Yorkshire, GLE oneLondon, for businesses in the capital, and UK Steel Enterprise, which works in areas affected by changes in the steel industry.

To access the scheme, you will need to approach a lender directly. It is entirely at the lender's discretion whether or not funding is given. The Government's Department for Business, Enterprise and Regulatory Reform (BERR) has more information on the scheme, including clarity on the level of security that lenders can demand. Go to www.berr.gov.uk.

Other government measures

The Regional Loan Transition Fund, which is only for England, provides loans to businesses that are turned down by banks and other commercial lenders. It is a £25 million scheme, operating until June, and is administered by Regional Development Agencies. For more information, go to www.englandsrdas.com.

There is also the Capital for Enterprise Fund, which allows companies to sell their debt in exchange for an equity stake in the business and a share of future profits. The Government has put £50 million towards the scheme, which is available to businesses that have turnover up to £50 million and need long-term capital. Call 0845 4599780 to register.

From November, entrepreneurs have also been able to use the Government's Business Payment Support Service, which allows deferral of tax, national insurance, VAT or other payments owed to Revenue & Customs. Call 0845 3021435 for more information.

A Prompt Payment Code was established last year to encourage fairer payment practices between large and small businesses. More than 150 organisations have signed the code, including Tesco, Shell and BAE Systems, but the FSB says that more needs to be done to penalise late payers in the private sector.

For further information on the Government's schemes to help businesses, go to realhelpnow.gov.uk.

Further options

If your bank has refused your credit application, there are other ways of finding funding and support. However, you may be perceived as high risk, so it is vital that you have a solid business plan to show to potential lenders.

Business Link, a free support service at businesslink.gov.uk, is the first port of call when looking for funding, both locally and nationally. Sources of finance will depend on how the money will be used. For example, if funding is needed for building, it may be worth approaching the National Association of Commercial Finance Brokers. Business Link can advise on this and can also provide a free business healthcheck with an adviser.

John Grange, of Business Link, says: “First, business owners should consider whether they really need credit. Can they generate cash from within the business - by reducing stockholding or selling assets? It is also important to talk to your accountant, to ensure that all tax bills, such as corporation tax and VAT, are minimised and that all allowances are being used.”

He adds: “Friends and family may also be an option for loans. Alternatively, try to find a business angel or another shareholder. The British Business Angels Association may be able to help.”

If your business is struggling with debt, Business Debtline can advise on dealing with creditors, budgeting and maintaining cashflow. It can also advise on how to boost your personal income through tax credits and benefits. Call 0800 1976026 or go to www.bdl.org.uk.

Struggling in the face of high interest rates and stealth charges

The base rate may be at a record low of 0.5 per cent, but many businesses say that their banks are still charging excessively high interest rates and charges, and are increasingly demanding loans to be secured against assets.

Phil McCabe, of the Forum of Private Business, which campaigns for small businesses, says: “Interest rates are considerably higher than the base rate and banks are still levying stealth charges, including transaction fees, maintenance charges and even valuation fees.

“In all, 24 per cent of small businesses surveyed in March experienced fee increases, particularly for vital overdrafts. One business owner reported a 400 per cent increase in his arrangement fee. That is unacceptable.”

Lee Tillcock, of Moneyfacts.co.uk, the financial information website, says: “It is difficult to quantify exactly how much interest banks are charging on loans and overdrafts because the rates are normally negotiable. However, it is fair to say that business accounts continue to levy high charges.

“The Co-operative Bank's business account, for example, has a charge of £8.50 a day for using an unauthorised overdraft, at a rate of 25.5 per cent, with a charge of £17.50 for sending out a notification letter.”

Another concern for small businesses is how lenders assess and manage risk. Mr McCabe says: “We are concerned that lending applications submitted by small businesses are not being gauged accurately. There is a lack of experienced bank managers in local regions who are able to build relationships with business owners and judge them on a case-by-case basis.”

Taxman gets tougher

From this month the taxman has more power to investigate the self-employed. Revenue & Customs now has the right to enter any premises without notice to inspect business records, including part of a residential home used as an office.

Sue Holmes, of Smith & Williamson, the accountant, says: “This could affect the many thousands of business people and sole traders who claim expenses for ‘use of home as an office'. The Revenue will also be able to request information relating to transactions to assess an individual's ‘tax position'. This includes past, present or future tax liabilities, so notices inquiring into a transaction in advance of submitting a relevant tax return are now clearly within the scope of the Revenue's powers.”

Ian Walker, also of Smith & Williamson, adds: “The Revenue is also likely to be imposing much higher penalties on incorrect tax returns. Previously, a penalty of

100 per cent of the tax due could be levied, but in reality the amount could be negotiated to a much lower rate of 10 per cent or 15 per cent. Now, there are clear guidelines and a careless error will incur a 30 per cent penalty, while a deliberate error will trigger a 70 per cent fine.”

Case study - NatWest delays strangle cashflow

Simon Knight owns three construction companies in Milton Keynes and says that he is having a “torrid time” with his bank, NatWest. Mr Knight, left, has been granted many loans over the past ten years - one of which was for nearly £1.5 million - but says that his bank is now dragging its heels over a £100,000 advance to build new property.

“I have banked with NatWest for eight years,” he says. “In the good times, it was chucking money at me, but now it doesn't want to know. Its refusal to give me a loan means that I have to use my overdraft, which has strangled cashflow. I asked if I could access the Enterprise Finance Guarantee scheme, but it said that I do not qualify because I have too many assets.”

The 48-year-old adds: “My last quarterly statement had £728 in overdraft interest charges and £200 of other charges. My business is solid and profitable and I'm loath to take business advice from a bank that has been bailed out by the taxpayer for being run imprudently.”