Business lending contracted for the fifth month running in July as small firms continued to feel the brunt of tighter credit conditions, the Bank of England said yesterday.

The net repayment of £2.5 billion was an improvement on the £3.2 billion recorded in June, but the bank’s latest Trends In Lending report highlighted that lending by major UK lenders remained subdued into August. It also reported that while credit concerns were easing for larger businesses, they remained tight for smaller firms.

Most companies have been seeking to pay down debts in the wake of the recession, but smaller firms are being hit because they have fewer alternative sources of funding than large multinationals.

“Contacts of the bank’s network of agents noted that while credit conditions were easing for larger businesses, they remained tight for smaller firms,” the report added.

The spread, or profit, made by banks on loans to large firms continued to fall with new facilities to small and medium-sized firms broadly unchanged over recent months. Overall demand for credit has remained subdued, it added.

The bank has slashed interest rates to a record low of 0.5 per cent and pumped £200 billion into the economy through quantitative easing (buying up assets with newly created money) to boost the money supply.