Lending to smaller firms has hit an all-time low, according to a study by the Federation of Small Businesses.
The industry group accused banks of "pulling up the drawbridge" to small companies.
One beauty clinic owner told the BBC she had to "jump through hoops" to get a business loan.
Lucie Grech applied to five banks for loans since setting up The Laser Lounge in October 2019 but has only just succeeded in securing any money.
Ms Grech had been seeking a business loan in order to expand her clinic in Manchester from one room to five rooms, but says the whole process was a "nightmare".
"This was mainly because I was a sole trader and no loan companies or banks would entertain me, even though my business is highly profitable despite the pandemic."
She says she made multiple applications to banks trying to borrow anywhere between £5,000 and £50,000, but with no luck.
"I was jumping through hoops," she says. "I couldn't get any financial support at all."
Lucie's experience is far from unique, a report suggests.
According to the Federation of Small Businesses (FSB), successful finance applications plunged over the first three months of this year.
The survey, which heard from 1,200 of the group's members, found that just 9% of small firms applied for new finance in the first quarter of 2022. Only around two-fifths of those who did apply were approved, a record low.
Over the same period, according to the Bank of England, lending to large companies increased significantly.
The FSB also found that around a 10th of small firms planned to close, sell or downsize over the coming year. That equates to more than half a million businesses.
Six in 10 small firms were being impacted by late payments of invoices, the study said.
The FSB's chair, Martin McTague, warned that without proper funding for small firms economic growth in the country will be stifled.
"Lenders pulling up the drawbridge for small firms will threaten our already faltering economic recovery," Mr McTague said.
"Businesses are born every day across the UK - many need funding to get off the ground, ensuring they reach a stage where they're profitable and creating opportunities."
Mr McTague said a "culture change" was needed, with lenders taking an objective approach to small business finance.
Lucie has just managed to secure a loan, although she says it was £15,000 shy of what she was asking.
Still, she says it is a relief to have the funds at all.
"It wasn't till the day I got the money into my account that I believed it," she says.
"The whole reason I wanted the money was to expand my premises and create more jobs," she added. "Hopefully this can happen now."