Smaller companies face tough times as a direct result of the credit chaos affecting the world‘s largest banks, business groups have warned.

The Federation of Small Businesses admitted companies could be put out of business by banks imposing rates of interest on business loans that were last seen in the 1980s in a bid to claw back money lost to bad debt, or refusing to lend money altogether.

“On a scale of one to 10, with 10 being blind panic, we are at a seven at the moment,” a spokesperson for the FSB told The Telegraph. “It could get worse.”

The organisation claims some of its members are already facing interest rates of 10.75% a year as interbank lending rates have increased to 6.9%. This is in spite of the decision not to raise interest rates.

“We have still got a huge fallout from flooding and this on top is going to make it extraordinarily difficult,” warned Mike Cherry, financial affairs chairman of the FSB.

“It is the last thing small businesses need. They need banks to be more supportive. We would not be surprised to hear of more business failures with this double whammy.”

Cherry warned that entrepreneurs wanting to start businesses would also be hit by the crisis. “The big problem we are going to find is that the amount of money available to small businesses is going to be less,” he said. “The goalposts are being moved much tighter by the banks.”

The British Chambers of Commerce expressed fears that the credit tightening could also hit large companies which in turn would impact smaller suppliers.

“The concern to date is that large companies are going to find it harder and more expensive to borrow,” he said.

“If the big business is finding it more difficult to borrow, then clearly, investment decisions they make will be either slowed down or cut back. That will undoubtedly have an impact on smaller companies. Quite clearly we are in for a very bumpy ride,” he added.