The study reveals that a quarter of small firms (24 per cent) say they find it hard to keep pace with technological change. One in ten small businesses (13 per cent) still do not use email; a third (30 per cent) have yet to use the Internet as a source of information; and less than half (47 per cent) believe that such technology has improved working life. A fifth (18 per cent) believe that technology has taken the 'personal touch' out of working relationships.

The study also shows that IT literacy levels leave room for improvement. Only one in ten businesses (13 per cent) said their staff had an excellent understanding of technology such as PCs and the Internet, with a third (34 per cent) saying their employees had only an 'average' level of literacy. One in twenty (six per cent) believe IT skills were not required in their business.

The research highlighted a number of areas in which small firms could make better use of technology to manage and grow their business. It showed that most small businesses are not exploiting technology to its full potential, with only a third (35 per cent) reporting that they have used the web to generate business and only 28 per cent saying that investment in IT has helped them develop new markets.

However, there is evidence that firms do recognise the value of IT, even where they are not making full use of it. Two thirds of small businesses (61 per cent) admitted they would not be able to operate without their current level of investment in IT and almost half recognised that spending technology was vital if their business was to remain competitive. Almost half of those surveyed (47 per cent) said using IT had helped them cut costs.

Half of the small businesses surveyed said they had spent less than £5,000 on IT including computers, software and Internet connections over the past 12 months. Firms in the business services sector were the biggest spenders, with a quarter (23 per cent) spending more than £20,000 over the past year, compared to only 17 per cent of manufacturers and fiver per cent of retailers.

The survey also showed:

• One in five (19 per cent) do not yet have a broadband connection
• Two fifths (38 per cent) do not use computerised databases or mailing lists
• Almost two thirds (58 per cent) do not use IT for presentations

Stephen Pegge, head of Communications, Lloyds TSB Business, said: "Small firms have tended to limit their use technology to communicate and organise information, but, have been slower to wake up to the opportunities these tools might present for purchasing, production and distribution.

"If small businesses fail to invest for the future, they may not meet customers' expectations and could find they are soon overtaken by more efficient and more productive competitors. It's part of our responsibility as a bank to help small firms make the best use of technology to maximise their potential."