Confidence among small businesses has fallen, jobs have been cut and many firms continue to be refused credit from banks, according to a new report.
The Federation of Small Businesses (FSB) said its survey for the second quarter of the year showed that smaller firms were also feeling pressure from rising overhead costs.
The proportion of companies looking to grow has fallen back, with one in five of almost 3,000 questioned saying access to finance was the main barrier.
Two out of five small firms applying to the banks for credit are refused, said the FSB.
Chairman John Walker said: "If small firms cannot access credit it constrains their investment plans. We know from past research that many small businesses missed growth opportunities because they couldn't access the money they needed.
"There needs to be more competition in the finance and banking sector because only when there are more options to choose from will small firms get a fairer deal. There also needs to be more alternative sources of finance that small firms can tap into.
"This ongoing credit squeeze is becoming critical. Government is relying on small business growth to drag the UK out of recession. The will of small businesses to grow is there but the money to enable them to do so is not.
"Unless this situation is addressed effectively and rapidly, that confidence might evaporate altogether, with dire consequences for the economy."
Of 17 industry sectors studied, confidence fell in all but two - health and motors - with financial and real estate services showing a "dramatic" decrease.
