Under the proposal, loans made to sound SMEs would be bundled and sold as bonds to the Bank of England in a process the chancellor George Osborne described as "credit easing".
The scheme was announced at the Conservative Party Conference yesterday by Osborne, who acknowledged that the major banks still aren't lending enough to small businesses.
"We’ve got to get credit flowing in our economy," said Osborne. "We’ve struck a deal with the big high street lenders to increase lending to small businesses by 15 per cent this year. But all this may not be enough.
"So as part of my determination to get the economy moving I have set the Treasury to work on ways to inject money directly into parts of the economy that need it such as small businesses. It’s known as credit easing.
"It’s similar to the National Loan Guarantee Scheme we talked about in opposition. It could help prevent another credit crunch, provide a real boost to British business, and over time help solve that age old problem in Britain: not enough long-term investment in small business and enterprise."
Details of how the proposal will work are currently being worked on by the Treasury and are due to be published in the government's growth plan on 29 November. However, the announcement was welcomed by business groups.
John Cridland, CBI director general, said: "Small firms need credit and, with the continuing Eurozone crisis, banks can only do so much, so the proposal for credit easing to get money directly into the hands of smaller businesses could be just what the economy needs, if it can be made to work. But these are uncharted waters and these proposals need to be fully worked up as quickly as possible."
John Longworth, director general of the British Chambers of Commerce (BCC), added: "Credit easing could help solve the problems in delivering much-needed credit to businesses, but the devil will be in the detail as to how this could work.
"What business needs now is to see the words of the Chancellor implemented so they can feel the benefits of a growth agenda."
In addition to the announcement on credit easing, the chancellor revealed that the government would revise employment legislation to protect business owners from speculative employment tribunal claims.
He said that the government would "respect the right of those who have spent their whole lives building a small business not to see that achievement destroyed by a vexatious appeal to an employment tribunal".
"We’re now going to make it much less risky for businesses to hire people," said Osborne. "We will double to two years the amount of time you can employ someone before the risk of an unfair dismissal claim.
"And I can tell you today we are going to introduce for the first time ever a fee for taking a case to a tribunal that litigants only get back if they win. We’re ending the one-way bet against small business."
The announcement was welcomed by both the CBI and BCC. Longworth said: "A recent BCC survey showed that a staggering one in five businesses have been threatened with a tribunal claim in the last three years.
"When faced with a tribunal, a large proportion of small businesses opt for settlement since the cost is lower than defending a claim. This drives a culture of settlement, encouraging spurious claims and undermining the cases of those employees who have a fair claim to compensation, and acts as a brake on growth and jobs.
"We have long supported the principle that claimants should have to pay a fee to access the tribunal system. Claims are endemic and, though fees will help, they will not, on their own, be enough. The government must cap proposals to force firms who lose a case to pay a punitive levy to the Treasury, and reform the rules to force tribunals to award firms costs when a claimant has acted in a malicious manner."
The chancellor also highlighted the work done by the government over the past 16 months to make Britain "open for business", including cutting business rates, increasing spending on roads and railways, creating more apprenticeships and simplifying the tax code system.
"For small businesses we’re freezing rates, cutting taxes, [and] stopping new regulations in their tracks," added Osborne, who outlined the government's priorities for growth as: reforming finance, keeping interest rates low, getting credit to small business, helping fix the eurozone crisis, and helping businesses to create tomorrow's jobs.
