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The head of Barclays' small business unit has criticised the idea of industry-wide government targets for lending to small firms.

Steve Cooper told the Financial Times that it could result in banks agreeing loans to meet targets rather than on the merits of applications.

The government is exploring the option of extending targets to all banks, not just ones in which it owns a stake.

There are fears that insufficient bank lending is holding back recovery.

The governor of the Bank of England this week described constrained lending as a "headwind" facing the UK economy.

The government already places gross lending targets on the two banks in which it has a shareholding - Lloyds Banking Group and Royal Bank of Scotland - which they have been meeting.

Some have suggested that these and other non-government supported banks should be subject to the more stringent net targets for lending to small businesses.

On this measure, which takes into account loans being paid off, net lending has typically been flat across the industry.

Seeking solutions

New targets are currently only one of a number of proposals being studied as a means to increase cash flow to small and medium-sized companies.

Ideas also being analysed in the Financing A Private Sector Recovery green paper include encouraging venture capital and so-called business angels to invest more widely.

Business Secretary Vince Cable has also suggested that bank dividends and bonuses could be a target as part of a "carrot and stick" approach to boost lending.

A spokesman for the Department of Business, Innovation and Skills said it was "crucial for the recovery that small businesses are able to access the finance they need".

"As set out in the green paper we are exploring all areas, including bank lending," he added.

"The government is working with the banks and looking to the industry to provide the solutions. If that does not materialise we will consider other options."

The British Bankers' Association says its members are doing all they can to increase lending to small businesses.

Its most recent figures show that a total of £598m in new loans were granted in June, £70m more than in May.

Lending defended

Mr Cooper also defended the interest rates Barclays charged small businesses for loans.

He said the "vast majority" were paying 5%, and while some firms were being charged as much as 19.9% this reflected their low credit ratings and the fact they were not able to put up any security.

A Barclays spokesman added that the bank has "not constrained" in its lending to smaller businesses.

"In fact we are lending more, so for us the question of targets is not relevant," he said.

"If we feel it's a viable business and it's responsible to lend, then the business will receive finance from us.

"Which is why we have lent almost 30% of new lending to small businesses this year."

New loan scheme

While the government is exploring ways to help bring more private investors and small firms together, a new business has been launched to do just that.

Funding Circle is an online marketplace that enables private lenders to offer money direct to small companies.

Launched on Friday, small businesses can apply for loans of between £5,000 and £50,000, to be paid back over a one or three-year period.

Funding Circle estimates that typical interest rates charged to borrowers on the loans will be between 6% and 9%, with borrowers also paying the website an initial £50 application fee.

Once funding is agreed, small firms will also have to pay Funding Circle 2% of the amount borrowed, but the application fee will be refunded.