This is going to be a dangerous winter for British companies. Many are running into cash-flow problems as a result of increasing difficulties in financing their working capital. Insolvencies have picked up sharply in the past few weeks, and the big accounting firms report that more companies will have their accounts qualified as auditors question their ability to continue.

The risk is that otherwise viable companies will be brought to their knees by the lack of bank support for their day-to-day needs. There is already a groundswell of anger in businesses around the country. The banks have been saved from disaster by taxpayers’ money, so the argument goes, but they are now not willing to support us in our time of trouble.

Part of the problem is that some of the banks are in a state of shock. Senior managers have been replaced, and some executives are struggling to complete their capital-raising efforts. With share prices still falling, it’s not business as usual.

Moreover, the Treasury has yet to complete the recapitalisation agreements for a number of banks. The delay is damaging for all. Such is the current lack of confidence in the money markets that so long as banks are not seen as being backed by the taxpayer, they can only gain access to very short-term finance from the money markets. This puts constraints on their lending activities.

The credit markets remain jammed up. Banks are still not willing to lend to each other freely, fearing there may be more nasty surprises. The spread between Bank rate and three-month Libor, the rate at which banks lend to each other, is lower than it was at the worst point in the crisis, but it is still way above its historic levels.

The recession is also making things worse. Businesses are taking longer to pay their bills, which means that firms at the end of the supply chain need more working capital just to keep going. Credit risks are increasing as the economy slides into recession. Insurers are w i t h d r a w i n g credit cover f r o m l a r g e numbers of UK businesses, exposing them to risk if customers do not pay their bills. And a s p r o p e r t y p r i c e s decline, loan covenants are being breached.

Despite the recapitalisations, some banks are not in good shape to support their business customers in the normal way. Back in 2001, according to the Bank of England, UK customer lending was roughly comparable to customer deposits. You put £1 in, they lent £1 out. But in the first half of this year, the surplus of lending over deposits – the so-called customer funding gap – was over £700 billion.

That gap has been filled in the past few years by investors in the wholesale money markets – buyers of mortgage-backed securities and the like.

But most of them have now disappeared. To plug the gap, the banking system is having to scramble to raise its deposit base and other forms of finance. More significantly, banks also have to cut the rate of growth in their loan books.

Taxpayers help out by providing new capital for some. And the Bank of England is offering support through its loan-guarantee scheme and special liquidity arrangements.

But there is still a need for banks to deleverage - that is, to reduce the size of their balance sheet relative to their capital base. That means tighter credit conditions for all of us.

The critical issue is if banks feel they can spread the deleveraging process over a few years, the pace of customer lending will slow significantly but will still register modest gains (see chart). But if they try to complete the process more rapidly, the result will be a credit shock of great severity.

Business requires urgent action now if the worst outcome is to be avoided in the next few months. Here are some of the policy initiatives that are required.

Recapitalisation has to be completed fast, to restore confidence to the interbank market and help bring down Libor.

The fiscal boost the chancellor is to announce tomorrow must be focused on the cash-flow problems of companies, especially small and medium-sized enterprises. That is the best way to support jobs.

Bank rate has to come down further.

The Financial Services Authority and the Treasury have to make it clear that banks now have enough capital both to absorb losses that might arise in the recession, and to continue lending to businesses on normal commercial terms.

The banks must make lending to the real economy their priority. Much of the growth in their loan books in recent years has been to the financial sector - hedge funds and the like.

It might be rational for a single bank to deleverage rapidly in the face of the recession. But if the whole sector chooses this path, the entire economy - and therefore the banks themselves - will end up in a much worse shape. This suggests the need for collective action by the banks to tackle the problem.

By next summer, credit conditions should have eased. The economy will have had a size-able monetary and fiscal stimulus, and the money markets should be in better shape.

The big concern is about how much unnecessary damage might be done before then.

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