The clock is ticking for travel agent Tina Sawhney. On Monday her bank told her she has until the new year to find another mortgage lender or her business premises and the rental flats she owns above it will be repossessed.

The stress of being told the bank no longer wants her business has taken its toll. “I keep bursting into tears about it. It’s heartbreaking to think about the possibility of being repossessed. My tenants will be on the streets if this happens,” she said.

She is no sub-prime borrower. Her loan of £160,000 is secured on a building valued at £690,000 last year. “I have a long track record with the bank, I’ve owned the building since 1991 and I’ve never missed a single mortgage payment,” she said. “The manager told me I was a great customer but that the bank had taken a commercial decision not to do this type of lending any more.

“There was no flexibility and no chance of giving me any more time. The bank must be desperate if it’s asking for money back on a property worth four times the mortgage.”

Her experience is indicative of a funding crisis, brought on by the credit crunch and near meltdown of the British banking system that is punishing small businesses.

Asad Khan has also been left in the lurch. Having agreed a deal with his bank to fund the £280,000 purchase of a third site for his Indian restaurant chain called India Dining, he exchanged contracts on the property only to find the bank had backed out when he came to completion.

The bank was initially happy to lend 70% of the value of the purchase but, said Kahn, it then got cold feet.

“They started asking us to show them we could service the loan. We showed them the profitability of the other two restaurants but they told us they no longer wanted to support projection-led lending. They were treating the lending on the new premises as start-up funding even though we had a track record of growth and profitability.” The rejection left him scrambling to find another deal to cover the purchase of the new site. “We spoke to several brokers and none of them was able to find funding for us. Some of them wanted huge up-front fees with no guarantees they would get us a deal. In the end, we had to organise bridging finance, which we are still stuck with. We are paying 1.5% of the value of the loan every month and no other lender will look at us.”

The lack of finance means that Khan, who had planned to open 20 restaurants within the M25 in the next five years, has had to put his ambitions on hold. He is now seeking a private investor sooner than expected to enable him to pay back the bridging loan and continue his expansion.

The contraction in lending is also hurting Thai food importer and distributor Chuanglee. NatWest has steadily cut its invoice discounting facility to the firm from £750,000 to £200,000 despite the fact that it is a 20-year-old business that has grown consistently and profitably, said Michael Paterson, one of the firm’s directors.

Its bank is also becoming choosier about which of the firm’s customer invoices it will lend against, said Paterson. “We have a close relationship with our customers, whom we have known for donkey’s years. Relationships like that are valuable things for a business but the bank doesn’t take account of that. We have never had problems with bad debts but, all the same, when the going got tough RBS took away the umbrella.

“It means we are putting pressure on our customers and the team here has had to spend so much time juggling finance and cash in the business that we have not been able to concentrate on growth opportunities and acquisitions.

“We’ve had several opportunities to expand but we’ve had the confidence knocked out of us now because we never know where we are with the banks. They are being totally in discriminate in their lending and taking away funds from the good and the bad. We’re lucky, we’ve been able to adapt to the pressure the bank put on us. A lot of businesses are in a far worse position.”

In response to the funding crisis, the minister for competitiveness and small business, Baroness Shriti Vadera, pledged to help restore lending to small firms and to make government departments, local authorities and the NHS pay smaller suppliers promptly.

Government departments are already making 88% of payments to small suppliers within 10 days, Vadera told The Sunday Times this weekend. “For small firms the most important things are credit and cash flow. That’s why we are trying to improve prompt payment and we are in discussions with local authorities and the NHS to see that they do that too.

“Across the government, this department and the national economic committee, we are very focused on this issue. We understand what these companies are going through and we are doing everything we can to help,” she said.

Stephen Alambritis, who is a spokesman for the Federation of Small Businesses, said government help was needed to get lending to small firms flowing again.

“The government acknowledges that, without help, small firms will suffer and so will the British economy. Three jobs lost in a small business here, and ten lost in a business there might not seem a lot but, put together, they could add up to lots of redundancies. Small firms employ 13.5m people in the UK,” he said.

The £1 billion that Britain will be getting from the £12 billion emergency funding package from the European Investment Bank Fund will be used by UK banks for small-business lending, said Alambritis. “Ministers also realise there is a need to make bank managers fall in love with theSmall Firms Loan Guarantee Scheme,loans that the government backs.”

William Flatau, owner of the commercial finance brokerage First Finance, is not optimistic about the outlook for small firms that need cash. Every day he talks to businesses affected by the collapse in bank lending and in many cases cannot put together deals to help them because of the reluctance of the banks to lend.

Flatau predicted that it would take a long time for lending levels to return to normal, whatever action the government or banks took now. He also doubted some of the pledges from banks that they were open for business to small firms.

“We hear a lot of announcements from the bosses of the big banks. What we don’t know is whether they are really open for business. My gut feeling is that many of them are still being very cautious.

“In many cases the banks are not telling businesses in distress that they are pulling their support.

Instead they are stealthily reducing their overdrafts. If a company gets a big payment of £30,000 in, they will reduce the overdraft facility from £ 50,000 to £20,000. Practices are getting quite a bit sharper in this environment.”

This week Flatau will launch a website, Lendertracking.org, in an attempt to find out from other commercial brokers which lenders are lending and which are not.

“The purpose of Lendertracking is to find out what’s really happening on the street for businesses that are in urgent need of money.”

Additional reporting by Tom Banks