ALMOST one in 20 of the UK’s small firms could fail this year as the recession starts to bite in earnest. Of the 4.7m British small firms, 200,000 could go bust in 2009, according to a forecast from the Forum of Private Businesses. The FPB’s Phil McCabe said this was a worst-case prediction but a realistic one if banks do not increase lending to small firms in the next few months.

Such a failure rate would mark a huge increase from previous years. In 2007 some 13,500 firms went under. In the two years of the last recession in 1991-92, 100,000 firms failed.

Mass failures of small and medium enterprises would also add to Britain’s mounting job losses because such companies employ 60% of the 22m workforce.

McCabe said there was already evidence of staff cuts. “While many of our members are well placed to ride out the recession, these are testing times and we do get a lot of calls from firms that are struggling,” he said.

The failure rate of small firms will depend to a great extent on the willingness of the banks to resume lending to viable firms, said McCabe. “We are not satisfied with the level of lending or the approach taken by a number of banks, including those that have benefited from the bailout.

“There’s a creeping tendency to label small businesses in certain sectors as high risk. We want to see a return to judging each lending decision on its merits.”

Government-backed plans to revive bank lending to small firms, due to be revealed in greater detail on January 15, are likely to come too late for the entrepreneur Asad Khan.

He has spent a gloomy festive period contemplating the prospect of repossession after his attempts to refinance the loan on the third London restaurant in his India Dining chain came to nothing.

Khan said he was furious about a lack of communication by the bank that left him thinking he had a mortgage deal that would have replaced a costly bridging loan he had taken out in the summer.

In late December the bank told Khan it was not prepared to offer the £280,000 loan after all. “They will not allow us to exit the bridging loan without having the restaurant up and running but we can’t progress any further because we have run out of money. We seem to have exhausted all the options.”

Unless he can do a deal in the next two weeks, the interest rate on the loan will double to 36% and the payments would be at a level Khan could not meet. If he defaults and the property is repossessed Khan will also lose the £100,000 he has spent fitting out the premises so far, which he has managed to fund from the cash flow from his other two restaurants.

What galls Khan the most is that the bind he finds himself in is of the bank’s making. And he is particularly exasperated given the track record he has with his bank, which he declined to name.

“We have a history with them. They have more than enough equity and security but they still don’t want to do the deal.

“It’s outrageous. It seems they will only do deals that are a dead cert.”

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