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Drop in credit requests by small businesses

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Loan applications from smaller firms showed a decline in the first three months of the year.

The Bank of England’s latest credit conditions survey found that demand for loans among smaller enterprises dropped in the first quarter of 2011 largely as a result of seasonal and weather-related factors along with worries over the impact of government spending cuts.

However, lenders said that they expected demand for credit from firms with turnovers under £1 million to pick up in the second quarter.

Overall, though, the availability of credit to SMEs remained unchanged during the first three months of the year.

Margins on lending to small businesses rose, and increased operating costs are likely to see this trend continue in the months ahead. There were small rises in the fees and commissions on small business lending too.

David Kern, chief economist at the British Chambers of Commerce (BCC), commented: “The findings of the survey confirm the difficult circumstances facing the UK economy in the first quarter of the year and the pressures facing businesses, especially smaller firms. While the overall availability of credit has increased a little in the first quarter, the amount offered to small-and medium- sized businesses is broadly unchanged.

“The findings confirm that a lack of demand remains a major obstacle to adequate credit growth. In particular, there has been a sharp decline in demand for credit from small businesses. More worryingly, spreads on lending to smaller companies have increased, adding to pressures on their profits.

“Overall, while there are no major surprises in this survey, it highlights the risks facing the UK recovery and the importance of making every effort to support growth, particularly for smaller firms.”