Nearly two years into the recession, bankers and their business customers are still talking past each other when it comes to lending. SMEs have complained of the declining availability of finance, tougher terms and conditions and overall frostier relationships with the banks. The banks insist they are open for business and continuing to supply credit to viable enterprises across all sectors.

This seems like an impasse, the collision of irreconcilable points of view, but both perceptions are actually pretty accurate. Banks are indeed lending, but fewer companies are meeting their criteria. This gives businesses the impression that lenders are hoarding while the banks protest that they are doing all they can to get money into the economy.

The key to understanding this is viability: without it the banks won't lend. It is the cornerstone of their credit decisions.

An independent survey conducted earlier in the year by consultants Mazars bore this out. Mazars found that banks' decisions to refuse credit were usually reasonable in view of normal commercial criteria. In other words, the banks avoided bad credit risks, and there are a lot of bad credit risks out there.

The lending environment is driving this phenomenon more than lending policy changes, according to bankers. They say economic conditions have become so bad that even when they apply the same credit standards they relied on during the boom, fewer customers meet them. Hence the contraction in lending and the belief among businesses that there is less finance available.

"It all goes back to viability. Do they have orders in place? We will supply working capital to support that," says Damian Young, head of small business lending at Bank of Ireland. "We look at a business that is providing revenues and get a list of their debtors: who owes them? How much? For how long?"

The main decision criteria, he says, are capacity to service the debt, a pipeline of confirmed orders and the track record of the people backing the business. Businesses without revenue, with lots of debt or insufficient capital get turned down.

Young says the number one problem with his customers is debtor collection, which puts pressure on the cash cycle and makes it harder for borrowers to repay loans. With payment periods stretching to an average of 75 days or more, there is a chain reaction throughout the economy which not only makes it harder for banks to say yes, but makes business owners reluctant to seek funding in the first place for fear of getting caught in a credit squeeze.

"Banks reject projects, not people. We don't say no unless we have some concern about the business," said John Kelly, general manager of small business at AIB. "This is about cash flow, quarter by quarter. SMEs need to help themselves."

Kelly said every borrower has to demonstrate three to six months of cash flow, provide audited accounts and certification that all its tax liabilities are up to date. Only then will the bank consider approving a loan. This, he says, is the bottom line for any borrower. But he also insists that credit demand is exceptionally weak, so that most of the SME business AIB does is helping businesses get through difficulties rather than providing the means for new investment.

Statistics bear this out. According to quarterly private-sector credit statistics published last week by the Central Bank, lending to businesses last quarter fell in every sector apart from financial services and property. New credit to non-property businesses fell by 6.2%, while outstanding credit declined by €4.1bn to €49bn as firms deleveraged.

The report's authors attributed the downward trend to two complementary factors: decreased demand for loans from companies, combined with tighter credit standards among lenders.

ISME's latest quarterly business trends survey confirms that getting credit remains a problem for some businesses, with 11% citing access to finance as their biggest immediate concern. But some of the survey's other key findings – which read like a litany of economic horrors – fill in the credit picture with more significant detail.

For instance, nearly two-thirds of the survey's 500 respondents said the viability of their business was under threat in the next year if conditions do not improve. With so many businesses questioning their own viability, is it any wonder banks are scrutinising credit decisions more carefully and rejecting likely failures?

AIB managing director Robbie Kelleher and retail and SME general manager Denis O'Callaghan were quite blunt about this when questioned by the Oireachtas committee on enterprise over the summer: "It is not in our interest, or that of our customers, to support propositions that are not viable in the long term."

This is a classic chicken and egg problem. On the one hand, prospects for small businesses are bleak without access to finance, but on the other hand access to finance is hindered by the bleakness of the outlook.

"Access to finance is one element of viability," says ISME's head of research, Jim Curran. "Banks are not lending as much as they say they are. Our experience is that many companies are finding stricter criteria harder to comply with, which allows the banks to say they approved loans but the borrower didn't comply with the conditions."

According to Curran, when AIB or Bank of Ireland report that they are approving eight out of 10 applications for credit, they are neglecting to mention how many would-be borrowers don't take up the offer because of conditions they feel they can't meet. If a prospective borrower is approved for credit but is not prepared to commit to a personal guarantee, the bank can point to the approval while the business experiences it as a refusal.