The Government is to offer loans directly to small businesses as banks continue to withhold credit from them. Companies will be able to seek loans of up to £250,000 from Regional Development Agencies (RDAs), which ministers think will have an important role as Britain falls into recession.

Lord Mandelson, the Business Secretary, has approved the first such scheme - £4 million for Advantage West Midlands to give loans to small businesses “at commercial rates”.

Ministers are pressing other RDAs to follow suit and this pot is expected to grow dramatically. They emphasise that the money should be available only for “viable” companies and should not be used to delay failing ventures going bust. However, the agencies are desperate to prevent legitimate companies from suffering as a result of the lending difficulties experienced by banks.

It is one of two schemes run by the Business Department that allow businesses to borrow from public funds. The other - the Small Firms Loan Guarantee Scheme - offers guarantees for businesses without assets to obtain loans of up to £250,000.

The move comes as Government appealed to business groups to provide more comprehensive evidence on the effects of the squeeze on lending.

Ministers have been overwhelmed by anecdotal evidence of the effects of the credit crunch on bank lending. They have little concrete data on the scale of the problem and are putting pressure on bodies such as the CBI to provide more detail to help them in discussions with the banks.

RDAs have a total budget of £2 billion to help business and regeneration schemes around the country.

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