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Small firms still having difficulties in getting bank loans

Many small and medium sized enterprises (SMEs) are still struggling to raise money from banks despite an agreement between lenders and the Government, a new report has revealed.

Some 12% of SMEs experienced difficulties obtaining finance over the past year, according to a survey by insurance giant RSA and Warwick Business School.

Amid the squeeze in lending, SMEs are increasingly looking to give away stakes in their companies in return for cash, as a "Dragons' Den mentality" emerges.

The problems in raising cash will cause concern because SMEs are seen as the lifeblood of the economy, employing 20 million people, and are at the forefront of the Government's strategy for fuelling growth.

The Treasury this year struck up the Project Merlin agreement with the UK's biggest lenders, which saw them pledge to hit targets for lending to SMEs in 2011.

The latest figures from the banks show they had lent £56.1 billion to small and medium enterprises in the first nine months of 2011, meaning they were on course to narrowly miss their £76bn full-year target.

Manufacturing firms faced the biggest struggle to raise money, with 15% reporting difficulties. This suggests that the Government's strategy of rebalancing the economy by making more goods is also in jeopardy from the trend.

Tara Kneafsey, a director at RSA, said: "Confidence is a critical factor for SMEs as we approach 2012 - confidence in knowing they are protected should the unexpected happen and confidence in having access to capital to maximise growth opportunities.

"Our research suggests that this investment and support will increasingly be sought from private investors rather than banks in the coming years."

The report also revealed that 32% of SMEs said the economic downturn had a major impact on their business in the past year.

The companies surveyed planned to invest an average of £102,000 to grow their businesses over the next two years.