'6,000 small firms could fail in capital as banks squeeze loans'

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The Federation of Small Businesses said lenders were forcing its members to "jump through hoop after hoop" to get credit.

Companies claim banks are constantly changing the conditions of loan offers, leaving them unable to plan ahead.

Stephen Alambritis, of the Federation of Small Businesses, said: "Gone are the days when a bank manager would offer a loan arrangement and leave it undisturbed for a year - they review accounts every month. That unpredictability breaks businesses. Banks are making small businesses jump through hoop after hoop to keep their funding, or promising to lend a certain figure then altering conditions."

Figures from the British Bankers' Association show business lending falling alarmingly.

Banks lent £345billion to non-financial firms last month, compared with £349.1billion in June. Half of that net fall was due to repayment of loans but it was still sharply up on the previous monthly fall of £259million.

Availability of finance was particularly poor for smaller firms, who do not have access to sources such as capital markets. Mr Alambritis claimed banks were making money on rearrangement fees. He said: "Banks will often give an overdraft a bit smaller than a business needs so they breach it. They keep making them renegotiate funding which incurs fees."

A CBI survey showed banks reducing smaller firms' credit lines. Restaurants, pubs and hotels polled by the British Hospitality Association thought attitudes were hardening.

Mr Alambritis said: "As bank share prices go up, they are stashing the money instead of lending to small businesses.

"London's diverse businesses will disappear."