Hundreds of firms 'to go bust by Christmas'

HUNDREDS of small firms will go bust by the end of the year if ministers fail to deliver quickly on their pledge to increase bank lending, business leaders have warned.

Despite repeated calls for action from Gordon Brown and Chancellor Alistair Darling, it emerged that companies were still suffering from banks doubling overdraft charges and increasing interest rates.

The squeeze on bank lending puts huge pressure on the Government amid public expectation of a return for its £37 billion bailout with taxpayer cash.

Abbey yesterday increased rates by half a percentage point and Mr Brown was facing further embarrassment today as the nationalised Northern Rock was expected to axe its tracker mortgages.

As Business Secretary Lord Mandelson prepared for a grilling by the House Of Lords, it emerged he had been personally warned by business leaders yesterday that firms were facing bankruptcy before Christmas.

The issue dominated the inaugural meeting of the Regional Economic Council, set up by Mr Brown to help mitigate the impact of the recession.

John Cridland, deputy director general of the CBI, said after the meeting that the credit squeeze imposed by the high street lenders was "as bad, if not worse, as it was six weeks ago". He added: "We understand why [improved funding] has not happened but the Government needs to continue to work with the banks ... there's only so long companies can hold the dam." Mr Cridland said this message had been "received and understood" by the Chancellor and Business Secretary.

The message will be driven home next week when Lord Mandelson chairs the first meeting of a forum set up to "thrash out" differences between the banks and small businesses. The British Chambers of Commerce on Wednesday issued a stark warning ahead of the forum, highlighting its "serious concerns" about banks "indiscriminately" withdrawing credit facilities and changing terms without notice.

"If things carry on like this, many - certainly hundreds - of sound UK businesses will be bust by Christmas," David Frost, BCC director-general, said. "The banks are not going to lend to every business but the concern is there are good businesses who are not getting support." The Federation of Small Businesses estimated 50 businesses a day were going under and warned that this failure rate was set to double by the new year if lending conditions did not improve.

Stephen Alambritis, head of parliamentary affairs at the federation, said despite the Government's "good intent", bank managers were "taking a hard-nosed stance and reverting to the type of the early Nineties [recession]".