By Alex Stevenson Follow @alex__stevenson
Britain's struggling small businesses will be able to secure cheaper bank lending as a result of the government's credit easing initiative unveiled today - but business leaders are warning it is not a "panacea" to the UK's bank lending problem.
The measure, originally announced in the autumn statement, is now ready to be rolled out one day ahead of George Osborne's third Budget.
It seeks to address the shortage of lending to businesses, which has fallen in nine of the last 12 months. Total lending to businesses has fallen by more than £6 billion.
Credit easing involves the Treasury providing £5 billion over a six-month period to high-street banks Barclays, Santander, Lloyds and RBS. Three further £5 billion packages of funding will be released over the following 18 months, at six-month intervals.
This money will not be directly made available to the small- and medium-sized businesses, with turnovers of up to £50 million, set to benefit from the scheme.
Instead it will be used to underwrite unsecured bank lending, which will enable the banks to secure their borrowing at a cheaper rate.
Banks will then pass on the entire benefit to smaller businesses through cheaper loans, giving businesses a discount of one per cent on what they would otherwise have received.
"The government promised to help small businesses get access to lower interest rates. Today, we deliver on that promise with a nationwide scheme," the chancellor said.
"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 onto businesses."
HSBC declined to participate because its larger customer deposits means it would lose money by taking part in credit easing, which involves a government guarantee on bonds issued on wholesale funding markets.
If the scheme generates sufficient demand the government may double the amount of funds available to £40 billion.
But credit easing - known as the national loan guarantee scheme (NLGS) - has met with a mixed reaction from the business world.
The CBI's director-general John Cridland called it a "clear signal from the government that it is seeking to address aspects of access to finance for smaller businesses, including the cost of lending".
He said it would not solve the "structural issues" faced by UK businesses, however, while British Chambers of Commerce director-general John Longworth warned it was not a "panacea".
"The NLGS 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," Mr Longworth noted.
Stewart Baird, founder of small business investor, Stone Venture Partners, echoed Mr Longworth's view. He said: "Cheap money will not spark the economy. Money in the right places will spark the economy.
"One percentage point is neither here nor there. It's bizarre that everyone except the government is able to see that.
"You can bet your bottom dollar that the smallest companies with the biggest growth potential won't get to see any of this money."
The Treasury said that a firm taking out a £1 million loan under the NLGS would receive a discount of £10,000 a year - "money", it noted, "that can be reinvested in the future of that business".
Labour poured scorn on the idea, attacking the government for taking five months to prepare the initiative after its initial announcement in the autumn statement.
Shadow business secretary Chuka Umunna pointed out that over half of firms applying for an overdraft for the first time in 2011 were rejected.
"Over a year ago, the government announced its Project Merlin deal with great fanfare, promising that it would lead to an increase in lending and that bank CEO pay would be linked to lending targets," he commented.
"But instead, we saw targets missed and business as usual in bonus payouts. British business cannot afford another damp squib like Merlin.
"Labour is planning for a British investment bank to help SMEs and we are also looking seriously at proposals for a UK version of the US small business investment company scheme.
"It is a shame that the government has shown such a lack of ambition in this area."