£20bn state bailout for smaller firms is not enough, says CBI

Lord Mandelson, the Business Secretary, has insisted that he is offering "real help" for small and medium-sized businesses bearing the brunt of the credit crunch, despite criticism of the measures he unveiled.

A government guarantee for some lending would, he said, "free up capital which the banks must use for new lending". He added: "This is lending that would otherwise not be provided." Gordon Brown said the proposals were "targeted and focused".

The much-trailed plan, finally unveiled yesterday, comprises three elements. The flagship proposal is a working capital scheme guarantee worth £10bn, under which the Government will underwrite 50 per cent of £20bn of short-term bank lending to companies with an annual turnover of up to £500m in return for a fee.

A smaller but similar scheme will secure up to £1.3bn of additional bank loans for small firms with an annual turnover of up to £25m, with the Government guaranteeing 75 per cent of the advances made. Finally, the Government will launch the "Capital for Enterprise Fund" worth £75m, made up of £50m from the state and the rest from banks, which will be available for small firms needing equity. Under the £10bn working capital scheme, the Treasury will provide £225m to cover likely losses. At 2.2 per cent, this is a relatively small sum, suggesting that the Government is not moving particularly far along the "risk spectrum" described in recent days by Lord Mandelson. It also implies that banks are still unwilling to take on even such relatively small credit risks.

The fees are still to be negotiated between the Government and the banks. Some institutions are thought to be keener than others on joining in; those with a significant taxpayer shareholding being the more likely to refer loans to the Department for Business, Enterprise and Regulatory Reform (DBERR). The working capital scheme is designed to run until the end of March 2011. No company can approach DBERR directly for assistance; instead the banks will refer packages of loans that they would not otherwise undertake to DBERR.

The banks will be required to certify that the bank capital freed up will be redeployed for other business lending. Lord Mandelson said the banks' intent will be certified and their delivery audited. The scheme goes live on 1 March.

However, larger companies will have to wait for help. Richard Lambert, the director-general of the CBI said: "The scale of the problem goes well beyond what the Government has announced today. Although today's package will un-doubtedly help many hard-pressed firms, it is silent when it comes to larger companies. Those businesses at the heart of so many vital supply chains face the daunting prospect of refinancing over £100bn of credit facilities during 2009."

Yesterday, Lord Mandelson acknowledged the problem and said that the situation would be kept under review with a view to "further measures".

Many other business leaders urged the Government to go further. The director-general of the British Chambers of Commerce, David Frost, commented: "If a rapid take-up highlights the need for more financial support then we would expect the Government to work with the banks to extend the package."