There was a glimmer of good news for some bosses last week after Labour unveiled a scheme to guarantee up to £20bn in loans to small and medium-sized firms. Labour’s Business Secretary, Lord Mandelson, said the proposals would target “genuine business needs” to help small firms survive the economic downturn.

Central to the Government’s loan plan is a £10bn Working Capital Scheme designed to help banks lend capital to businesses. In effect what this means is that Labour will, in return for a fee, insure banks against companies defaulting on loan repayments. The proposals amount to a 50% guarantee on of £20bn short-term loans to firms with a turnover of up to £500m.

Mandelson is reported as saying: “The £10bn injection to banks represents a guarantee to enable them to free up working capital to sustain existing loans and create new ones.”  But he added that “a condition of [banks] getting the money will be that they negotiate with the government on what capital will be freed up”.

Bank lending is to be targeted at “innovative, viable and growing” companies that are finding it difficult to access working capital, for example to pay employee wages.

Other parts of the package include a pledge by Labour to put aside £225m to cover any repayments that can’t be made by some small businesses that may default on loans. Plus there will be a new Enterprise Guarantee Scheme, which will secure up to £1.3bn in additional bank loans to companies with a turnover of up to £25m. These companies will be able to borrow a maximum of £1m, with 75% guaranteed by the Government.

In addition, Mandelson said that Labour was setting up a £75m Capital for Enterprise Fund specifically for businesses with high levels of debt that have “exhausted traditional forms of financing”. £50m will be provided by the government and £25m by the major banks.