The FPB's Chief Executive, Phil Orford, met Mr Brown at a breakfast meeting to discuss the experiences of members on its new economic downturn panel, which has been launched today. Members are being surveyed every two weeks to provide detailed evidence on how the downturn – and difficulties in accessing finance – are impacting on small businesses.

"I informed the Prime Minister that we want to see the FTSE 250 companies, in particular, adopting the principles of corporate responsibility when dealing with their supplier base," said Mr Orford. "By paying them promptly, these large companies can significantly improve the cash flow of small firms, which are already being squeezed by the credit crunch. It would mean that many more would be better equipped to survive the downturn."

Today's meeting with the Prime Minister, which was held ahead of the Government's Pre-Budget Report on Monday, 24 November, coincided with an FPB petition being placed on the 10 Downing Street website. It urges the Government to monitor the banks' lending to small firms, and to ensure that lenders stick to their bail-out obligations and stay open for business.

The FPB also announced it has responded to a statement of lending principles from the British Bankers' Association (BBA), which represents the UK's banking industry. While the FPB welcomes the BBA's commitment to treat businesses ‘sympathetically and positively', Mr Orford called for more clarity. Evidence from the FPB shows that many businesses are, in fact, experiencing a poorer service from their banks.

More than 70% of members on the FPB's economic downturn panel reported that, prior to September 20008, borrowing facilities were ‘as expected'. Now, however, 43% consider them to be ‘worse than expected'. In addition, 47% of members on the panel reported an increase in banking fees.

While 32% are not satisfied with the banks' response to the current economic situation, almost as many (26%) are satisfied. Significantly, just 6% are satisfied with the Government's support for small businesses (with 71% saying they are ‘dissatisfied').

According to the panel's initial findings, business loans have become more expensive. The average interest rate has increased from 2.7% above the base rate in 2007 to 5.6%, with a sharp increase over the past three months. In addition, figures from the Cambridge University's Banking Industry Group (BIG) show that 15% of business owners applying for an overdraft in 2007 were rejected, compared to 19% of members of the FPB's panel. The cost of overdrafts has increased significantly, from 4.9% before September 2008 to 7.6% over the base rate, despite the 1.5% interest rate cut.

Reasons for lending being rejected include risk aversion on the part of bank managers, including the belief that certain industries – such as estate agents and construction firms – are ‘too risky'. In addition, banks are increasingly demanding that loans are secured against business owners' personal – rather than business – assets.

"Too often personal security is seen and used as the easiest and quickest route to securitise the lender. There is a rising trend for banks to secure personal guarantees and take a charge against personal assets," Mr Orford added, following his meeting with Mr Brown. "Wherever possible, business assets should be used as security. We would consider it to be irresponsible lending if business asset securitisation has not been fully explored."

Evidence from members on the panel highlights this trend, with 37% securing borrowing facilities using the security of their own homes, compared to 20% using their business premises, and 20% their debtor book, as security.

The FPB's Economics Adviser, Phil Whyman, who is professor of Economics at the University of Central Lancashire's Business School, believes the banks are using small businesses to plug the gaps in their finances.

"The FPB panel of SMEs reinforces the evidence coming from other sources, that banks and financial intermediaries are seeking to rebuild their depleted reserves by increasing the margins between payment for capital – savers – and the cost of borrowing, whether via borrowing to finance a mortgage or to sustain business activity," said Prof Whyman. "The Government has stated that, as one criteria for recapitalising large swathes of the otherwise partially-bankrupt banking system, liquidity has to be maintained through continuing to lend to consumers and companies. This is vital because, if risk aversion on behalf of the banks feeds through into the real economy, then economic activity will suffer further, with businesses unable or unwilling to invest and running down stocks, and with consumers unable or unwilling to make large purchases due to uncertainty about future outcomes."

Professor Whyman said that, as a large shareholder in a sizeable proportion of the banking sector, the Government now has the authority to set the parameters for its future regulation, and can insist on business lending being continued.

"However, this condition, whilst necessary, is insufficient, as the FPB panel demonstrates, because it is the cost of the availability of lending that matters, and if this is ratcheted upwards, despite base rates continuing to decline, then the Government's strategy will be effectively thwarted," he added. "Consequently, the Government, perhaps through Financial Services Authority (FSA), needs to ensure that bank margins do not rise so far as to choke activity in the rest of the economy."

"Undoubtedly, any action of this kind will draw criticisms that regulators are interfering in the commercial activities of the banks, but it is the reckless activities of the banking sector that have created this problem, and therefore a little curbing of their damaging overreaction to their own folly seems to be a small price to pay to prevent recession turning into a deep slump."

The FPB is a member of the Government's Small Business Forum and Small Business Finance Forum. Today's meeting with the Prime Minister was attended by a range of business organisations, in addition to the FPB. Also present were Ministers, including the Chancellor of the Exchequer, the Rt Hon Alistair Darling, and Baroness Shriti Vadera, the Parliamentary Under-Secretary for the Department of Business, Enterprise and Regulatory Reform (BERR).