Bank lending to small and medium sized firms has fallen by 20 per cent over the last quarter under the government’s Enterprise Finance Guarantee Scheme (EFG).

The system offers banks a 75 per cent state guarantee to encourage them to lend money to ailing or growing businesses. However, figures from the Department for Business, Innovation and Skills show that lending dropped from £186 million in the first quarter of this year to £149 million in the second.

Mark Nelson of Compass Business Finance said banks are still reluctant to lend: “We’re hearing anecdotal evidence of banks that don’t want to be seen to be refusing finance drawing out loan applications to the point that the applicant simply gives up. They won’t say ‘yes’ or ‘no’, they’ll simply continue to ask for more information until the person applying decides to try another lender”.

However, Phil Orford from trade association the Forum of Private Business  said the scheme, which will make £1.3 billion available to banks, is “very sound”. He added: “I have no hesitation that this money will be exhausted this year”.

The EFG came about in early 2009 after a revamp of the old Small Firms Loan Guarantee.

The government will guarantee £700 million of loans this year under the EFG -the scheme is available to firms with sales of up to £25 million who want to secure a loan of up to £1 million over the course of three to ten years.