Lending under the Government's small business lending flagship the Enterprise Finance Guarantee (EFG) scheme has fallen a further 7 per cent across the East Midlands in the last quarter according to Aldermore, the new British bank.

Lending to East Midlands SMEs under the EFG scheme dropped from £10.5 million in Q2 2010 to £9.8 million in Q3 2010. Across the UK, lending under the EFG scheme has now fallen by 35 per cent in the last year from £217 million in Q3 2009.

Aldermore says one worrying aspect about the scheme is that it is failing to get funding to SMEs in those regions of the UK that are most exposed to public sector spending cuts. This includes the Midlands, where 26.7 per cent of the workforce is in public sector jobs, according to ONS figures.

This is reflected across the UK. During Q3 2010, the amount of funding received by Northern Ireland SMEs fell by 56 per cent from £3.2 million to £1.4 million. The North East saw a fall of 17 per cent from £6.7 million to £5.6 million and funding to Welsh SMEs dropped 12 per cent from £6.3 million to £5.5 million.

According to the ONS, the public sector in the North East accounted for 32.2 per cent of the total workforce, in Wales that figure is 32.9 per cent and in Northern Ireland 30.8 per cent of the total workforce is employed by the public sector. These figures are significantly higher than the UK average of 19.5 per cent.

Tony Smedley, managing director of Aldermore Invoice Finance in the Midlands, said: "With so many SMEs unable to secure credit from big banks, the continuing decline in lending through the EFG scheme needs to be reversed.

"It is particularly worrying that certain regional economies are suffering some of the greatest falls in funding. These areas are amongst those with the highest reliance on public sector jobs in the UK.

"EFG is a great scheme - it has been an excellent way of making extra capital available to fund small businesses. Unfortunately, amounts actually lent under the scheme have declined over the last year."

The Government has recently announced changes to the EFG scheme that may have made it less attractive to bigger banks. The Government's guarantee of lending under the EFG is capped at 9.75 per cent of total funds lent out by each bank. The cap on the guarantee is set to be reduced even further to 9.225 per cent (from April 1 2011).

Tony Smedley said: "Rather than reducing the EFG guarantee for lenders, increasing the guarantee is one way the Government could encourage the big banks to lend more to small businesses."

"If the Government were willing to underwrite a larger proportion of the EFG loans, then more loans might be written.

"As a bank that is focused on SME lending and which is very well capitalised, Aldermore doesn't need any enticements to lend to small companies but clearly the EFG has helped encourage other banks to provide more funding to SMEs.

"The Government could also consider reducing the fees that small businesses that are charged for using the EFG pay to the Government."

Aldermore Invoice Finance recently appointed Anthony Melvin to spearhead the expansion of its operations in the East Midlands and service the funding needs of SMEs across the region.