More than 20,000 small and medium-sized businesses (SMEs) will go bankrupt before the Government's scheme to boost lending to them takes full effect, a leading business body has warned.

The Federation of Small Businesses said that 110 SMEs a day would fail this year, with a loss of 150,000 jobs, despite the Government launching a £20 billion scheme this month to boost their access to finance. It has been cut dramatically by the banks during the credit crisis, forcing many businesses into difficulties.

Stephen Alambritis, spokesman for the federation, said: “It's going to take six months for the Government's efforts to take effect because it will take time for the banks to get used to it. We expect 20,000 businesses will go bust before then and that another 10,000 firms will fail in the final six months of the year.”

The government scheme has also come under fire from the Forum of Private Businesses, which said that many of its members were still being rejected for loans and overdrafts by some banks. Phil Orford, the forum's chief executive, said: “These financial packages were a welcome next step in supporting small business lending and stabilising the economy. However, the early indications are that small businesses are still being bracketed as risky propositions, often regardless of how well they are performing in difficult conditions.”

Under its working capital scheme, the Goverment will guarantee £20 billion in short-term bank lending to companies with a turnover of up to £500 million and a further £1.3 billion of bank loans to small firms with a turnover of up to £25 million. An additional £75 million enterprise fund is being set up for small firms in urgent need of equity.

The bleak forecast for SMEs, which employ nearly 60 per cent of the private sector workforce in Britain, came as new figures showed that small and medium-sized manufacturers are shedding workers at the fastest rate since the last recession.

Slumping demand for British-made goods, coupled with difficulty in accessing finance, forced 38 per cent of SME manufacturers to cut jobs in the three months to January, figures from the CBI show. Only 7 per cent of SMEs hired new staff, pushing the resulting balance to -31, down from -13 in the previous three months, and the lowest on record since 1992.

Job losses are expected to intensify as increasing numbers of firms face further falls in demand. The balance of firms reporting that they will reduce staff over the next three months fell to a record low of -38, down from -27.

The EEF, the manufacturers' organisation, said that this year it expects 90,000 jobs to be lost in the manufacturing sector, of which SMEs account for 90 per cent.

Russel Griggs, chairman of the CBI's SME council, said he hoped that the Government's loan scheme could ease the pressures on small firms. “Only the availability of credit will help stem the tide of job losses.”

But Mr Alambritis warned that the deep recession would continue to take a heavy toll of small businesses, even if credit was available.

“Any small firm that has an umbilical cord to the motor industry or areas related to discretionary spend cannot be helped by the government scheme because the demand is simply not there,” he said.

Optimism slips again

— Optimism among small and medium-sized manufacturers has deteriorated sharply, with the gauge of optimism falling to –71 in the three months to January, down from –57 in the previous three months

— The EEF, the manufacturers’ organisation, said problems for small manufacturers had been exacerbated by difficulties in the automotive sector

— It is calling for urgent action to help preserve skills within the manufacturing sector during the downturn

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