Osborne's big plan: £20bn for small business

George Osborne will pledge to remove a crucial barrier to Britain's economic recovery today by offering £20bn of government-backed, low-cost loans to small firms.

After failing to persuade the banks to release more of their cash reserves to boost the flatlining economy, the Chancellor will announce that companies with a turnover of up to £50m will be able to apply for the first £5bn tranche of loans from today. Banks taking part in the credit easing scheme will provide loans one percentage point lower than they would otherwise have been. Government guarantees will allow the banks to borrow at lower rates and they will pass this on to the small firms.

Mr Osborne promised his National Loan Guarantee Scheme last October and the details have finally emerged on the eve of tomorrow's Budget. He will say: "The Government promised to help small businesses get access to lower interest rates. Today, we deliver on that promise with a nationwide scheme. It's only because we've earned credibility with our deficit reduction plan that we have low interest rates, and it's only because of this scheme that we can pass the benefits of those low rates on to businesses."

The Treasury said it is not guaranteeing individual loans to businesses and so not taking on the credit risk of loans, which is retained by the banks. Royal Bank of Scotland, Lloyds Banking Group, Barclays, Santander and fledgling lender Aldermore have agreed to take part.

But HSBC has declined, saying the cost of its funding is already low enough without the government subsidy. And questions have already been raised about how much new lending to small firms the scheme will produce. The British Chambers of Commerce argued the scheme would not reach all those small firms in need of funding.

John Longworth, its Director-General, said: "While credit easing is a step in the right direction, it is not a panacea for all the problems faced by businesses trying to access finance. The National Loan Guarantee Scheme will make some loans more affordable. But it will not help the smaller, younger, and high-growth firms that have trouble getting credit in the first place."

John Cridland, Director-General of the CBI, said: "The scheme should help bring down the cost of loans but it will not solve the structural issues." He said the Government should also help firms secure funding over a longer period.

Chuka Umunna, the shadow Business Secretary, said the five-month delay in setting up the scheme reflected the Government's "lack of urgency and leadership". He said: "British business cannot afford another damp squib like Merlin."