Tories' secret plan for new lending fund

Ken Clarke, the shadow Business Secretary, and George Osborne, the shadow Chancellor, are working on radical new proposals to set up a funding institution to help the economy recover, to be ready if – or when – they come to office after the next election.

A group of entrepreneurs and financiers are working with the Conservatives on the secret proposals, which they hope to launch in the early autumn. Mr Clarke's business team is looking at different institutions – including a 3i-type model – to see which would be the most appropriate.

Some of Britain's leading businessmen, City financiers and venture capital experts are involved with the working party. As part of its research, the Tory team is looking at how other countries, particularly the US and Hong Kong, fund their start-ups and keep lending flowing to small and medium-sized companies.

Mark Prisk, the shadow minister for small business, said: "We are looking at what would be the best sort of institution to help funding for small businesses, from seed-corn to venture capital at the second level of funding. The £50bn National Loan Guarantee Scheme, which we have also proposed to underwrite bank lending to businesses, is part of this strategy. Obviously, 3i [once the UK's biggest backer of small ventures] is one option we are looking at. There is a danger the economic recovery will be hampered unless we get the necessary funding and lending in the banking system."

Mr Prisk added that the working party wants to establish precisely where the big funding gaps are in the economy. "Is it businesses which need £250,000, or is it narrower, those which need £25,000? But the most important object is to find out how we can get capital flowing through to revitalise corporate Britain." They will also be looking at whether the clearing banks should be forced to put funding behind any new venture.

Historically, the most difficult period for small businesses is after a recession, because this is when they find it most difficult to get long-term growth finance, and also when demand for this type of finance is strongest.

Ever since the banking crash last autumn, the Chancellor, Alistair Darling, has been trying to put pressure on high-street banks to ensure they follow through on lending commitments given in return for state help. But most are still charging extraordinarily high interest to small businesses despite the lowest base rate for decades.

The Government has launched the Rowlands Growth Capital Review, which is also looking to see whether state intervention is needed to ensure adequate finance will be available to firms as the economy improves.