In the FSB’s report ‘Alt+ Finance: small firms and access to finance’, the industry body is calling on the government to promote alternative forms of finance, such as peer-to-peer lending models, and to learn lessons from other countries where routes to finance are varied.

Related: How to use alternative business funding to help your company grow

Director of manufacturing firm Texane, Arnab Dutt, comments, ‘We need a reappraisal of the financing eco system for SMEs in the UK including developing non-bank finance models. SME’s are stuck with a handful of local banks who demand short term pay back, no risk and lend at usurious rates. SMEs need an alternative and we need it fast.’

Robert Ford, managing director of local produce retailer Tilia believes SMEs should rely on banks for nothing more than an account. He remarks, ‘It would be great if the government were proactive in clarifying other forms of finance.’

The FSB report draws on examples of best practice from foreign banks, such as German and US ones, which highlight fundamental weaknesses in the UK banking model.

The comparisons show that between 2007 and 2012 there was a 24 per cent fall in the number of successful loan applications for small businesses in the UK, compared to a nine per cent decrease in Germany.

FSB national chairman John Walker says, ‘It is only when you compare bank lending in the UK to the situation in countries like Germany and the US that you can see the extent to which our banking system fails to deliver what small businesses need.

‘We need to build alternative routes that connect savers and investors with viable small businesses eager to grow.’

Results from Bibby Financial Services’ Business Factors Index, taken during the fourth quarter of 2011, show that using personal savings to raise finance is the number one option for small business owners, ahead of bank overdrafts, loans and credit cards.

Only 4 per cent of firms say they had applied for funding through government initiatives.

Edward Winterton, executive director at Bibby Financial Services, says, ‘The lack of awareness among small and medium-sized business owners of the full range of available funding options is their biggest barrier for effectively accessing the finance they need to run and grow their firms. We feel there is an urgent need to educate business owners in the UK, from start-ups to more established businesses about their funding options and how they can access the facilities most appropriate for their business’ needs.’