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The government is preparing to guarantee up to 80% of loans to small businesses as part of a multi-billion pound package of measures to stimulate the economy.
An announcement is expected in the middle of next week about the latest attempts to kick-start lending to some of the country's leading employers.
The details are being finalised in a frantic round of negotiations with officials at Lord Mandelson's Department of Business and Enterprise, but it is thought the business secretary wants to agree a broader package of measures than was outlined in Alistair Darling's pre-budget report. The government wants to cover loans of up to £1m to businesses for up to 10 years because it is concerned that the economy will grind to a halt without a renewed flow of funds to small businesses, which claim they are being starved of cash by overly cautious banks.
Gordon Brown, the prime minister, yesterday insisted banks should honour a commitment in a government rescue package to maintain the supply of loans to mortgage holders and small businesses at 2007 levels. "We will be meeting the banks in the next few days to agree with them on how we can move this forward," he said.
Mandelson's department is at the heart of the current negotiations and the business secretary conceded more steps would be needed to get banks lending again. "Having saved the banks from collapse in the autumn we've got to take further action, I suspect, to get the banks back on their feet and lending properly," he said.
The government is looking at providing loan guarantees to medium-sized businesses, which employ 50 to 250 people and have a turnover of less than £50m.
It is coming under increasing pressure, not least from the automotive industry, to bring in measures to help stimulate the availability of credit to boost demand and help these companies ride out the economic crisis.
In the wake of Nissan's decision to cut its 5,000 strong Sunderland workforce by almost a quarter, Mandelson indicated he was looking at ways to help boost the availability of finance to carmakers. The government cannot help the car industry without spreading aid more broadly across the business community.
Mandelson said yesterday: "There is an issue to do with [the car industry's] ability to raise finance to fund new car purchases and that links back to the credit crunch, it links back to their access to liquidity, to drive their financing arms and that's something that I'm in close contract with car companies about, the Treasury is too."
"It may well be that we've got to see how the motor finance arms can be assisted, in terms of their additional liquidity needs, and that we're going to be looking at in the coming weeks."
Ministers have been working on a package to guarantee loans to smaller businesses since the pre-budget report.
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