Credit on the rise for small firms but cost still 'too high'

THE availability of credit for small manufacturers has increased for the first time since the recession - but the cost of borrowing is continuing to rise, research today indicated.

A survey of more than 500 businesses by manufacturing trade body EEF found that small and medium-sized firms alike were finding it easier to secure lending from banks.

However, the manufacturers' group warned that the rising cost of borrowing remained a challenge for many firms.

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The survey comes a week after figures suggested the UK's top banks were on course to miss "Project Merlin" lending targets for small businesses.

Barclays, Royal Bank of Scotland, Lloyds Banking Group, HSBC and Santander UK lent some 16.8 billion to small and medium-sized enterprises (SMEs) during the first quarter, putting them below their government-agreed target to lend 76bn during 2011, which equates to 19bn in each quarter.

But the EEF now says that its survey suggested lending to SMEs may have improved during the second quarter.

Although fewer companies reported a hike in rates on existing facilities, a balance of 22 per cent of firms said they had seen an increase in the overall cost of credit during the past two months.

The price hike was most pronounced on new lines of borrowing, with a balance of 28 per cent of companies reporting an increase in costs in this area.

Lee Hopley, chief economist at the EEF, said: "For the first time since the recession ended, manufactures are reporting improving access to finance.

"Hopefully, this will translate into better news on new lending in the coming months. But availability is only part of the story and we also need to see costs coming down.

"Ensuring companies have access to the finance needed to invest and grow is critical for the recovery. We need to see a sustained improvement before concluding that the actions taken by banks and government are bearing fruit and that no further measures are required."

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The EEF survey was published a day after an accountancy firm warned that HM Revenue & Customs (HMRC) is about to launch a crackdown on sole traders who have not registered to pay value-added tax (VAT) despite their turnover passing the 73,000 threshold.

Neil Whyte, tax investigation and dispute resolution partner at PKF, said: "I understand that HMRC's new campaign on VAT registration will be driven by simple data analysis.

"It is identifying individuals and businesses that have returned annual turnover above or very close to the annual VAT registration threshold and checking to see if they are VAT registered."

PKF added that HMRC could choose to introduce a "voluntary disclosure scheme" to allow sole traders to declare unpaid VAT.