Following up on his pledge to do more to ease credit for SMEs in his Mansion House speech last month the Chancellor has revealed the full details of his plans.
The Funding for Lending scheme involves the Bank of England making low-cost funds available to banks and building societies in order for them to make more cheaper loans available to SMEs.
This is not the first time the government has tried to exert pressure on high-street banks and various schemes, including the much heralded Project Merlin, have been launched with the aim of getting more credit flowing to spur growth in the small business sector.
The Funding Lending Scheme will open for drawings from the start of next month and last for 18 months with banks and building societies able to borrow UK Treasury Bills from the Bank for a period of up to four years.
The chancellor George Osborne said that loans would not only be cheaper but more easily available and it was working in conjunction with the Bank of England to improve the situation.
"The Treasury and the Bank of England are taking coordinated action to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy – showing that we are not powerless to act in the face of the Eurozone debt storm.," he said.
A spokesman for the Forum of Private Business, which recently revealed many of its members are still struggling to access credit, described the fund as a make or break moment.
“For many cash starved businesses who are desperate for growth capital, this scheme could ultimately be make or break," he added "'Make’ if it serves to grease the rusty wheels of bank lending, but ‘break’ if the banks don’t act on it."
“We have seen from a number of recent schemes, such as Project Merlin, that the banks will often pay lip service to these types of government initiatives, but then fail to make good on their promises," he added.