BANKS have rejected more than 40 per cent of loan applications from small firms, a report by Federation of Small Businesses (FSB) has revealed.

It says this has led to a fall in business confidence.

The FSB has published its Voice of Small Business Index which showed a drop of 5.8 points in business confidence over the past quarter.

More than half of the small businesses surveyed said that they wanted to expand during the next 12 months.

However, growth plans were being held up by the difficulty in securing finance. In the last quarter, 21.6 per cent of businesses surveyed had applied for finance but the number being refused rose to 42.4 per cent in the third quarter, down from 40.6 per cent.

The FSB said entrepreneurs’ confidence had been reduced in ten of the 12 UK regions as a result of the difficulty in securing finance and the lack of consumer demand.

The FSB is hopeful that the Bank of England’s Funding For Lending Scheme will help to cut the cost of credit and said that it would be keeping a close eye on the situation to ensure the cheaper lending rates are being passed onto small businesses.

John Walker, FSB national chairman, said: “It isn’t surprising that confidence fell back into negative territory as the recession entered its third quarter as growth flat-lines.

“The message is clear though – businesses want to grow and invest but they need a helping hand to do so.”