The government have revealed plans to guarantee small businesses £20billion of loans.

In return for a fee, the state will insure banks against companies defaulting on loan repayments. However there are concerns that £20billion won’t be enough for all businesses to share.

Prime Minister Gordon Brown has described the measures as “real help now to deal with specific problems”.

On the other hand, shadow secretary of state for business, Alan Duncan has claimed the move is “too little, too late, too complicated…a small bandage on a massive wound.”

The focus of the plan is a £10billion Working Capital Scheme created to help banks lend capital to small businesses. The government will also guarantee 50% of £20billion short-term loans to businesses who turn over up to £500million.

Lord Mandelson said: “The £10billion injection to banks represents a guarantee to enable them to free up working capital to sustain existing loans and create new ones.
“A condition of [banks] getting the money will be that they negotiate with the government on what capital will be freed up.” He added that some capital freed would be used for new lending.

He admitted that there would be some defaulting on loans, £225million has therefore been set aside to cover repayments that people can’t make.

An Enterprise Guarantee Scheme is also being set up, which will secure up to £1.3billion in additional bank loans to companies that turnover up to £25million.

This means companies will be able to borrow up to £1million 75% of which is guaranteed by the government. The money can be used for working capital eg paying wages, or new investments.

Finally, a £75million Capital for Enterprise Fund specifically for businesses with high levels of debt that have “exhausted traditional forms of financing” has been set up. £50million of this is provided by the government and £25million by major banks.

It is said the government is in discussions with credit insurance providers to provide similar guarantees on money small businesses owe their suppliers. British Chamber of Commerce director-general David Frost said: “businesses are critically in need of cash-flow. Any move to get banks lending again will be seen as good news at this bleak time. A government promise to guarantee individual loans to businesses is not only sensible, it’s crucial.”

Many believe £20billion will not be enough to solve the problem completely, with the Conservatives saying a figure more like £50billion would be more help.

George Osborne said the government was offering a shadow of the scheme the Tories came up with weeks ago, saying: “Let us hope that they will properly implement this Conservative policy rather than a pale imitation, or else they run the risk of repeating the mistakes of their expensive temporary VAT cut and achieving nothing.”

Vince Cable of the Liberal Democrats said: “the government should stop messing around with stunts and wheezes and ensure that the banks owned or part-owned by taxpayers operate as state banks maintaining lending for the economy.”