Small companies need to overcome their “psychological” fear of handing over stakes to venture capitalists or raise finance from staff if they are to overcome a long-term funding gap, the Confederation of British Industry has warned.

The CBI thinks funding problems faced by smaller companies even before the financial crisis have deepened and will remain even as the economy recovers.

In a report published today, the organisation said there needs to be the creation of a new breed of regional banking and investment institutions to save companies from “having to rely on a few very big players in London and Edinburgh”.

CBI director-general Richard Lambert also called for a return of a form of the old Industrial Commercial Finance Corporation, set up in 1945 by the Bank of England with funding from big lenders to provide capital to small and medium-sized companies who were too small to tap up the stock exchange. Listed private equity company 3i is the successor to the corporation.

Lambert said: “In contrast to a number of other economies, small firms in the UK don’t have much choice when it comes to raising money. They can’t issue equity bonds, or commercial paper at a sensible price and there is no ready substitute for the small handful of very large lenders.”

The CBI noted in its “The Shape of Business” report that the biggest barrier to smaller firms taking on venture capital money is “psychological”.

It said: “Owner-managers typically do not want to give up part-ownership of their business.”

But it noted wider issues: “Even where CEOs choose to use venture capitalists, they may face difficulty securing investments due to regional gaps in venture capital provision. Some businesses may also explore options to raise finance through employee partnership schemes.”

The CBI thinks big companies, scared by the threats to supplies during the recession as a number of small firms went under, might also help.

Lambert said: “Firms looking to reduce risk and acknowledging their interdependence are seeking more collaborative ways of working through partnerships and joint ventures. Perhaps we will see a flourishing of supply chain finance – in which firms with the largest, most solid balance sheets help finance their smaller suppliers or customers.”

A survey of 66 companies by the CBI found that 55% said the credit crunch had reduced their willingness to tolerate high levels of gearing in their businesses.

Within that, 70% said an economic recovery would not reverse their position. Two thirds expect no improvement in credit availability in 2010 and are reshaping their businesses’ finance. Half said they would use less bank debt,

while 44% said they would rely more on equity finance and 26% said they would make more use of bond issuance.

The CBI wants the costs of equity issuance by smaller firms to be tax-deductible.