The money will attract a further £10bn of lending from banks, who will normally share the risk 50-50 with the Government. Today's £20bn package will be followed by other measures next week to aid the banks and help bigger companies survive the downturn.
Ministers admit lack of credit for business is threatening to cause a worse recession. Firms face loan repayments estimated at £20bn this year and banks are taking a much tougher line on working capital and refinancing since last autumn's financial crisis.
Lord Mandelson, the Business Secretary, who will unveil the first phase of the Government's action on credit, will insist that ministers will not "pick winners" as they will leave decisions on loans to the banks. He will say the scheme will help viable firms who have short-term cash problems but good prospects if they can survive the downturn.
Ministers have rejected Tory calls for a national £50bn loan guarantee scheme, saying it would risk handing money to firms who do not need it. The Government will consider help for specific sectors of the economy, including the car industry, on a case-by-case basis.
Officials say the Government's scheme should eventually be "cost neutral" because most of the loans will be repaid and companies will pay a fee to take part. The £10bn plan is five times bigger than the loan guarantees envisaged for small firms in the pre-Budget report in November. Firms with a turnover of up to several hundred million pounds a year will qualify – much bigger than originally planned.
Hi-tech firms with potential to generate exports could be helped under a separate scheme under which the Government would guarantee up to 80 per cent of loans because they are seen as a greater risk. In a third scheme, the Department for Business will provide tens of millions of pounds of equity capital to ensure the survival of strategically important small companies who have borrowed too much.
Ministers hope that, with the Government helping to ensure firms get working capital, banks will take more risks in financing companies' investment and longer-term needs.
Lord Mandelson said yesterday: "I want to make sure that, when we intervene, we intervene in a way that's really effective, really targets real, genuine business needs in a way that gives value for money from the Government and the taxpayer's point of view, and is genuinely going to help businesses in what is a very difficult credit situation."
Downing Street said the Government was considering options to ensure businesses and households get access to credit. The Prime Minister's spokesman added there would be "no irresponsible blanket guarantees" and that any measures would be "targeted, thought through and funded".
Last night, the Tories accused Labour of copying their proposal. The Tories called for a "bigger, bolder and simpler" scheme open to all firms. George Osborne, shadow Chancellor, said: "It's good the Government is finally looking at loan guarantees. We've been arguing that a lack of credit is the problem at the heart of the recession."
The return of gruel, a meal fit for the credit crunch
Poor people, according to an edict passed down by the board of the workhouse accommodating nine-year-old Oliver Twist, faced a simple choice.
They should, Mr Bumble and his colleagues declared, "have the alternative of being starved by a gradual process in the house, or by a quick one out of it". And so it came to be that Twist and his orphan brethren would be served "three meals of thin gruel a day, with an onion twice a week, and half a roll on Sundays". This would be enough to mitigate the pangs of hunger that caused the board such nuisance. The mixture of oats, water and milk would fill stomachs and suppress rebellion.
Yesterday the grey, fetid stodge made a return to London. Outside Burlington House, which houses the Royal Society of Chemistry (RSC), its members were dishing gruel out by the bowlful. If your cornflake budget really has been crunched, its message suggested, you could do worse for inspiration than one of the great scenes of Victorian literature. In Dickens' critique of the Industrial Revolution, Twist approaches Mr Bumble and asks "Please sir, can I have some more?" But rather than receive more gruel, he is sent away.
Marking the start of the RSC Year of Food, exploring the science behind food production and consumption, the revival of the Victorian staple also coincides with tonight's opening of Oliver! in the West End. The dish, complete with chopped onion, was given out free to members of the public outside the RSC office. "It's extremely bland," said Jennifer Wilson, a retired scientist. "There's no flavour at all without the onion."
Leanne Fishwick, the RSC's resident dietitian, said: "I don't think anyone would recommend three meals of gruel a day, but it's actually not too bad for you."
Amol Rajan
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