Four of the UK's biggest banks have signed up to an "ambitious" lending scheme unveiled today by the Treasury to unclog the flow of credit to businesses.
The National Loan Guarantee Scheme (NLGS) will see up to £20bn of guarantees on unsecured borrowing by Barclays, Royal Bank of Scotland, Lloyds and Santander, which will be able to take advantage of the low rates currently enjoyed by the government.
The participating banks will pass on the entire benefit that they receive from the guarantees to businesses with a turnover of less than £50m through cheaper loans.
Banking giant HSBC will not take part as it is already able to raise funds on the wholesale market at a relatively low cost.
Chancellor George Osborne 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."
Small businesses that take out an NLGS loan will receive a discount of 1 percentage point compared to the interest rate that they would otherwise have received from that bank outside the scheme, the Treasury said.
The allocation of guarantees to each participating bank is at the discretion of the Treasury and based on factors including market share, gross and net lending, track record of lending to small businesses and capacity to lend under the scheme.
The first tranche of NLGS guarantees is for a total of around £5bn, with a minimum allocation per bank of £100 million, while the size and timing of subsequent tranches will be determined by demand.
The provision of guarantees is being administered by the UK Debt Management Office and as a condition of participating in the scheme, the banks have agreed a monitoring framework with the government.
The banks will have to submit quarterly reports containing data on the loans they have made under the scheme, and demonstrate that they are passing on all the benefit of the guarantees to businesses.
The government currently borrows at relatively low rates as a result of the UK's perceived safe-haven status from eurozone turmoil.
Steve Radley, director of policy at EEF, the manufacturers' organisation, said the government and the banks should be applauded for introducing such an "ambitious" scheme in such a short period.
But he added: "Government needs to undertake a major communications exercise, working with the banks at the branch level, to ensure that they are properly equipped to offer the new scheme to the smaller firms that need it."
The British Bankers Association (BBA) said: "A number of UK banks are participating in the scheme to help their customers by offering them cheaper loans - this is about encouraging growth and new lending.
"Banks know it is their job to help viable firms be successful and also recognise the part they have to play in supporting the UK economy."
However, the British Chambers of Commerce (BCC) warned the scheme was "not a panacea".
John Longworth, BCC director general, said: "The current economic challenges mean that the government must look at new and innovative ways of providing credit to viable firms.
"While credit easing is a step in the right direction, it is not a panacea for all the problems faced by businesses trying to access finance.
"The National Loan Guarantee Scheme 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."
John Cridland, CBI Director-General, said: "This £20bn initiative is 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.
"The scheme, otherwise known as credit easing, should help bring down the price of loans to small businesses, but it will not solve the structural issues."
Chief Secretary to the Treasury Danny Alexander said: "From today, thousands of Scottish small businesses will be able to seek out cheaper loans thanks to the UK government's National Loan Guarantee Scheme.
"This will help businesses save money and is only possible because of the United Kingdom's fiscal credibility and record low interest rates."