February 11 2010.

Alternative sources of finance may be the answer to the credit crisis engulfing small firms, according to a small business support group.

With traditional forms of lending to SMEs in short supply, the Forum for Private Business (FPB) believes that a move away from bank lending could help many firms to stay afloat.

As a result, it is urging the Government to look into creating more alternative options for small businesses which have been denied finance by traditional sources of lending.

The call comes in the wake of this week's Public Accounts Committee report, which found that the banks have broken their promises to lend to small businesses, placing many in danger of insolvency.

The FPB is continuing to lobby for banks to increase the supply of credit to small firms. However, the lobby group is arguing that 'counter-cyclical' alternatives need to be put in place which will be less affected by recession and will increase choice and diversity in the marketplace.

The options which the FPB believes policymakers should look into include corporate bonds, leasing, invoice financing, supply chain credit and, following the recommendations made by the Rowlands Review, venture capital.

The FPB is also arguing that the Government should consider steps to reduce small firms' dependency on external finance altogether.

The FPB has set out its views on the issue in a discussion paper, which will be submitted to the Treasury.

Additionally, FPB chief executive Phil Orford was today (Thursday 11 February) attending a meeting on non-bank lending with City minister Lord Myners at 11 Downing Street.

FPB policy representative Matt Goodman said: "Our research indicates that smaller businesses are too dependant on the banks for finance.

"At the same time, the recent crisis in the banking industry has made it clear that access to credit should be less dependent on the economic cycle. Any way of reducing the 'feast or famine' view of credit needs to be resolved before the next economic downturn.

"Of course, we will continue to lobby for the banks to increase lending to small firms and decide credit applications through a fairer and less centralised process. But at the same time, we believe the Government needs to put credible alternative sources of finance in place which will reduce the monopoly on lending the banking industry has."

Recent FPB research found that the main obstacles for businesses in accessing finance are bank-related.

The availability of credit from banks emerged as the number one problem for 19% of members, followed by the cost of finance (11%) and the perception that banks will only lend to businesses if the have assets (10%).

As a result, the FPB believes that the Government should prioritise promoting choice in accessing finance to ensure that future downturns in the UK economy are not made worse by issues over access to affordable credit.