Business secretary Lord Mandelson this morning announced the launch of the Enterprise Finance Guarantee, a loan guarantee scheme whereby the government will provide £1.3bn of guarantees to bank lending to companies with a turnover of up to £25m.

Mandelson said: "UK companies are the lifeblood of the economy and it is crucial that the government acts now to provide real help to support them through the downturn and see them emerge stronger on the other side.

"We know that some companies are struggling to secure the finance they need, not because of any failure in their business but due to the tougher credit conditions."

The Federation of Small Businesses (FSB) welcomed the initiative saying that the banks had "no excuse" not to lend to small businesses.

FSB national chairman John Wright said: "The onus is now on bank branch managers to actively promote this money to its small business customers to ensure their survival and the revival of the economy."

The Enterprise Finance Guarantee was launched alongside a £10bn Working Capital Scheme that will see the government provide guarantees on 50% of £20bn short-term loans to larger businesses with turnovers of up to £500m.

In addition, a £75m Capital for Enterprise Fund has been unveiled that Lord Mandelson said was aimed at businesses with high debt levels that have "exhausted traditional forms of financing".

The government will provide £50m for this fund, the rest coming from the major banks, and it will help small firms which urgently need equity.

The measures come as Unite calls for the government to "honour its manifesto pledge and raise redundancy pay". At a jobs summit held this week Unite assistant general secretary Tony Burke urged the Prime Minister "to loosen up Train To Gain funding" to help companies use downtime to upskill and retrain workers, rather than laying them off.

He also raised the plight of many SME's and the negative responses of some banks to pleas from small companies for extended loans for investment or to overcome short term problems. "We are seeing some decent companies with highly skilled workers being hit and broken up - once they are closed they rarely open up again."