The results of a survey undertaken by the Federation of Small Businesses late last year and published this week have revealed that the number of small businesses accessing credit via high street banks has fallen, despite commitments made under the auspices of Project Merlin, which was designed specifically to increase lending to small businesses.

According to the FSB poll, which was conducted among 11,367 FSB members, 35% used an overdraft as a major or minor source of funding in 2011, representing an 8% drop on 2009 figures. Just 11% made use of a secured loan to finance their business (down 3% on 2009), and 7% used an unsecured loan, representing a 4% drop.

The survey also revealed that around a third of respondents had used their own savings or inheritance to fund their business.

John Walker, National Chairman, Federation of Small Businesses, observed, on the publication of the figures, that:

"The Project Merlin figures are likely to show that overall the banks have missed their lending targets to the smallest of firms – although some of the banks have already said they met their individual targets. We have long said that targets are the wrong instrument to encourage lending and growth. Even though overall lending is above target, this shows that money is going to bigger businesses and not new and fledgling firms that need it to take advantage of growth opportunities that are there even in these challenging times."

He continued:

"Our research in the last two years shows that around a third of businesses are refused credit and this could be reflected in the fact that newer businesses are using more of their own money to fund their business rather than turn to the banks for help. What we need to see is better promotion of the alternatives available and for the Government to put in place their bold credit easing plans, which will help small businesses access finance on better terms."

However, in a statement released on behalf of the Project Merlin banks ahead of the publication of the official Bank of England 2011 new business lending figures, the British Bankers' Association suggested that their obligations had been met.

The BBA stated that:

"The Merlin banks (Barclays, HSBC, Lloyds Banking Group, RBS and Santander) have met business lending commitments under the Merlin Agreement. The five banks delivered GBP214.9 billion in gross new lending to UK businesses during 2011, including GBP74.9 billion to SMEs."

A spokesman for the Merlin banks reiterated:

“The Merlin banks have met their overall business lending commitments. This performance demonstrates the banks’ commitment to providing businesses with the financial support they need to invest and grow and the significant progress made this year.”

The Association went on to suggest, quoting the most recent Bank of England Credit Conditions Survey that "the demand for credit from small businesses has declined in three out of four quarters in 2011", controversially placing the blame for declining credit uptake at the door of small businesses themselves.

It concluded by arguing that "efforts to encourage customers to come forward with borrowing proposals are set against this overall challenging economic environment. The business demand for credit remains weak”.

In the wake of the news that the SME lending target had been missed by GBP1.1 billion (with GBP76 billion having been set as the target), reports in the UK media have placed the blame at the door of RBS, which has declined to reveal its lending figures; the other Project Merlin banks have reportedly stated that they have met their small business lending targets, or exceeded them in some cases.

It has also emerged that Project Merlin will be discontinued, with the government focusing its attention in 2012 on a new National Loan Guarantee Scheme, designed to ease access to in the region of GBP20bn in credit for small businesses over the next two years by offering government guarantees.