Customer complaints rise as bank staff levels withdraw.
The Forum of Private Businesses said a dependency on call centres - leaving customers feeling 'disengaged' from their banks - and a lack of staff able to make decisions quickly had affected service.
Its annual study, based on 7,725 responses, found that the overall performance of the banks had slumped to 1996 levels.
The Bank of Scotland, with a performance index of 52.9, and the Clydesdale Bank (47.8) propped up the banking service table, headed by the top-performing bank, the Allied Irish Bank with 58.6 points.
More customers also considered changing banks than in the last FPB survey two years ago. Lloyds TSB and NatWest led that table with more than 30 per cent of its small business account holders contemplating a switch.
FPB executive chairman Stan Mendham said the figures showed that UK banks were at a crossroads in their relationship with small firms.
He said: 'The benefit of faster and better information through IT improvements appears to have been wiped out for many small businesses by bank restructuring and staff reductions.
'The banks appear to lack people on the ground able to make the right decisions quickly enough and to act on them.'
Mr Mendham believed market segmentation, where small businesses get a level of service according to their size, had been a prime reason for a rise in the number of complaints.
He added: 'The great concern is that if small firms' see a reduction in bank quality in good economic times, what will happen when, or if, the UK experiences another credit crunch?'
The FPB's report calls on banks to improve the efficiency of decision-making and to consider the impact of call centres on its relationship with small businesses.
Other findings show that a fear of an overdraft being removed had joined the cost of banking as the top worries.
The number of firms using telephone and Internet banking almost doubled since 1998 to 29 per cent and 27 per cent respectively.
The British Bankers' Association, which represents all the major banks, described the report from the Forum of Private Businesses as 'valuable'.
It said: 'The banks will be taking the findings seriously and will be comparing these to the results of their own extensive surveys conducted with their small business customers.
'If it is a problem of perception, then banks will need to improve their communication.
If it is a problem with structure then banks will need to examine how they deliver their services to small businesses.