Banks that refuse to increase their lending to help small businesses with cash flow could see their profits and bonuses taxed by an angry government.

It is estimated at least £50 billion of new money could be generated by the high street banks if they cut back on dividends to shareholders and limited bonuses for bosses.

UK Business Secretary Vince Cable has accused the banks of turning a deaf ear to the cries of small and medium sized firms who claim they are finding it hard to access finance despite the insistence of the banks that they were meeting 80 per cent of requests.

A draft consultation paper, 'Financing A Private Sector Recovery', published by the Treasury and Business Department, has suggested the introduction of more government loan guarantees, regional stock exchanges in the likes of Edinburgh and Birmingham and expanding the role of mutual lenders  to prompt the banks into boosting cash flow. The deadline for responses to the ideas is September 20 however the British Bankers' Association claims that £6.8 billion was loaned to businesses in June and that lending to SMEs remained stable while there was some increase in borrowing by larger firms.

However, with many small firms, which make up the bulk of employers in the country, struggling to stay in business Dr Cable has admitted that the SME sector is facing a very serious problem accessing finance and affordable credit.

Unless the banking sector relaxes its grip on cash flow Dr Cable said he was prepared to take action against them, including taxing their profits and bonuses and possibly even breaking up larger banks to create more competition.

 “It is not just the lack of lending that is putting small and medium firms under enormous pressure but the crippling high charges, interest rates on overdrafts and almost impossible conditions imposed for even small amounts of finance,” commented Alan Wright of business improvement specialists Aspire Management Services.

“A lot of companies are being pushed into credit card debt and even towards the brink of collapse by the attitude of some of the banks who refuse to provide them or their customers with the finance to continue trading in very difficult circumstances. This attitude of the banks is making things much worse than they need to be.”

Some suggestions put forward by the government include encouraging venture capitalists and business “angels” to invest more widely.

“There are limited opportunities for many companies to find alternative finance, and anything that helps to encourage private investors to step up and provide some of the help the banks used to has got be welcomed,” said Mr. Wright.

“In return, many firms need to streamline their practices, step up their marketing and increase their performance to make themselves more attractive to private investors.”