The government has announced plans to guarantee up to £20bn of loans to encourage banks to restart lending to small and medium-sized businesses.

It will effectively insure against companies defaulting on payment in exchange for a fee.

The move comprises three main elements: £10bn made available to help businesses with day-to-day funding; guarantees for loans to financially solid firms looking to make long-term investments; and additional capital for companies in key sectors that have got into financial difficulty.

As part of the package, there will be a £1.3bn fund for smaller companies with a turnover of up to £25m. 

The Conservatives criticised the amount of money being made available but the British Chambers of Commerce welcomed the additional funding.

"Businesses are critically in need of cashflow," said David Frost, director general. "Any move to get banks lending again will be seen as good news at this bleak time.

"A government promise to guarantee individual loans to businesses is not only sensible; it's crucial."

There are concerns, however, that very little of the money will make its way down to the smallest businesses.