Lending through the Enterprise Finance Guarantee scheme reached £84m in the second quarter of 2013 – its highest level since March 2011.
Credit provided through the EFG has grown by almost 25pc since the end of last year, following intervention from the Business Department. However, the initiative is still almost 60pc below its peak in the third quarter of 2009, when it facilitated more than £200m of lending to small businesses.
The Bank of England has also warned that the smallest businesses are still finding it hard to secure credit, despite an improvement in the availability of finance for most companies, reports The Telegraph.
Under the EFG, introduced in 2009, the Government acts as guarantor on 75pc of individual bank loans of between £1,000 and £1m. The scheme was originally designed to assist companies that have viable business proposals but no security to offer against a loan.
Michael Fallon, the business minister, said increased EFG lending shows stronger demand for finance from small businesses that “are increasingly looking to invest and grow, and this is a positive indication for growth in the wider economy”.
Lloyds and Santander both significantly increased EFG lending in the three months to June.
However, Mr Fallon admitted the improvement in the scheme is “only scratching the surface of the problem”.
“We have made the EFG scheme more flexible and easier for banks to use and we are taking action to improve competition in the SME lending market through the business bank but, in the short term, we need the high street banks to help our businesses grow and keep the recovery going.”
Last year, Mr Fallon wrote to bank chief executives to ask why EFG lending was falling, despite government moves to make the scheme more attractive to lenders and to allow a broader range of small companies to qualify.
The Government also published research which suggested the initiative’s ability to power growth and job creation was at odds with lenders’ dwindling desire to access it.
Last week, the Bank of England said corporate credit availability is “improving” but warned that it remains “polarised” between large and small businesses.
Smaller firms holding few assets or operating in riskier sectors are still having significant problems, according to the Bank’s network of regional agents.
However, they noted that small businesses are finding it easier to secure finance from “non-bank” alternative lenders and that there has been greater activity by so called “challenger” banks, although often only in low risk areas such as asset finance.
The EFG has been adapted to provide trade credit guarantees to small construction companies, allowing wholesale customers of DIY retailers B&Q and Screwfix to be offered credit accounts.
More trade credit providers are expected to join the scheme “shortly”, the Government said.