ISME's latest quarterly Bank Watch survey finds that 43% of its members that approached banks for credit between December and February were refused.
But the refusal rate has fallen from 48% between September and November.
The survey showed that demand for credit has increased from 35% to 41%.
But it also stated that bank demands for personal guarantees from small business owners was restricting their ability to secure finance.
The survey also revealed that 33% of initial bank decisions were made within one week, an increase from the 22% in the previous quarter.
On average, the initial decision time is now just over four weeks, while the wait to drawdown has decreased from three weeks to two weeks.
It also shows that 45% of requests were for term loans, with 40% for overdrafts, or alterations to existing facilities. Invoice discounting/factoring accounted for 6% of requests, with 17% requesting funds for leasing.
Meanwhile, awareness of Government assistance remained high. 79% of firms surveyed were aware of the Credit Review Office, while 60% were aware of the Credit Guarantee Scheme and 55% knew about the Micro Finance scheme.
"We are pleased to see a small improvement in bank credit refusal rates in this quarter and we hope that this is the beginning of sustained progress on this issue," commented ISME's chief executive Mark Fielding.
"Recent results have seen us take two steps forward just to fall one step back as it seems the banks are not able to deliver consistent improvements in this area. This remains a vital issue for the SME sector and will be particularly pertinent as small businesses go for growth, now that we have finally entered a period of recovery," Mr Fielding said.
"It is essential that the bailed out banks get back to normal prudent lending as soon as possible. Funding issues for SMEs seemed to slip off the table during the election and must now be made a priority issue", he concluded.