George Osborne's Autumn statement made last week revealed a strategy of support systems for small to medium size enterprises (SME) in response to the difficult credit conditions stemming from the Euro crisis.
Initiatives, such as the Loan Guarantee Scheme and the Business Finance Partnership, will be worth up to £21 billion and are hoped to improve the cash flow of credit to businesses.
The report acknowledged that SMEs face difficult problems in the current economic climate because they are most reliant on the banking system for finance. They face difficulties because high street banks are most reluctant to lend to riskier borrowers such as SMEs in order to protect themselves against financial losses.
As part of the credit easing schemes, the government wants to partner with banks to lend to businesses in order to help small businesses cope.
Mr Osborne said: "There is a disconnect from what you hear from the banks and what you hear from the small business community.
"I'm sure of course there's an issue with demand. Some businesses are just nervous. But I think there's also a lack of supply. I think there is a lack of competition."
A similar scheme known as the Enterprise Finance Guarantee (EFG) was previously rolled out under the Labour government whereby the state underwrote 75% of a loan made to a small business. More than 14,000 have got EFG loans since its inception in 2009.
Some industry experts are skeptical of the chancellor's proposals to finance and grow business. Peter Chapman, Head of Rating at property consultants Cluttons said:
"Of course additional help for small businesses is to be welcomed, however the unfortunate truth is that this is too little, too late. The extended business rates relief will no doubt help some small companies weather the economic storm, but whether it will make any significant impact on the UK's financial state is doubtful. Many of the small businesses which would have benefited from the support earlier are no longer sustainable: this move is simply not enough to save them."
How The New Schemes Will Work:
National Loan Guarantee Scheme
A credit easing programme known as the national loan guarantee scheme (NLGS) will provide up to £20 billion guarantees for bank funding over a two year period. It is designed to make finance more readily available to small business by allowing lower cost lending. The state will underwrite loans and hopes to reduce the cost of loans to small firms by 1%.
Business Finance Partnership
A further £1 billion will go towards investment in medium size businesses through private lenders. It hopes to encourage non-bank lenders to co-invest with businesses with an Enterprise Finance Guarantee - as an incentive, those businesses who will provide finance for new companies will get 50% income tax relief and a one-year capital gains tax waiver.
For more information on business finance see our business banking section.