Business Secretary Vince Cable pledged the money to online peer-to-peer lenders like Funding Circle and Zopa and other finance suppliers.
He said match funding from the private sector will make at least £110m available to small businesses over the coming years.
“Small and medium-sized businesses need access to a diverse range of finance options, including non-bank lending,” said Dr Cable. “These new forms of finance are still small in scale today but they should, over time, bring additional choice and greater competition to the lending market.”
The Department for Business Innovation and Skills (BIS) said the money will be distributed via Funding Circle, Zopa, Boost & Co and Credit Asset Management.
Samir Desai, the 29-year-old chief executive of Funding Circle, said the Government’s investment in the sector should show small businesses that there are viable alternatives to the High Street banks. He told the Yorkshire Post: “We all know that in the UK we have a very concentrated banking system where 90 per cent of lending to small businesses is through five banks. As we have seen, the banks are retreating from lending to small businesses. We are very fast growing and we have substantial funds to lend.”
The London-based company has made more than 1,300 loans worth a total of £65m since launching in August 2010.
Individual investors lend a minimum of £20 directly to SMEs, which are vetted by Funding Circle, and receive interest payments in return. The average loan is £50,000 and is backed by 300-400 individuals. The loss rate is 1.5 per cent, said Mr Desai.
Sheffield-based High Access Solutions was able to borrow £135,460 through Funding Circle. It increased staff head count by approximately 25 per cent.
Mr Desai said: “We lend for any purpose; if they are looking to grow, employ new staff, buy new plant and machinery or need working capital, they can apply to us and we can get them the money.”
Funding Circle has received £20m from the Government. It has also signed up local authorities as investors, including Lancashire County Council, which joined six weeks ago. The local authority has committed £100,000 to date and plans to invest more.
Mr Desair said he would welcome approaches from other local authorities in Yorkshire.
The Government said Zopa, based in Norwich, will receive £10m to offer in loans through peer-to-peer lending. Boost & Co, a new London-based fund management company backed by private equity, will receive £20m to set up a fund that will make loans between £1m and £8m to small businesses. Credit Asset Management Limited, a subsidiary of City of London Group plc which provides specialist financing to the SME sector, will receive £5m to provide asset finance and loans.
Leeds-based crowdfunding platform Rebuilding Society welcome the Government’s announcement. Spokesman Nick Moules said: “I’m delighted the Government has chosen to support businesses through peer-to-peer lending.
“In conjunction with the recent announcement that the Financial Conduct Authority will regulate the industry from April 2014 it is certainly a mark of its rising importance and credibility in the lending market.
“However, in the interests of generating healthy competition we’re disappointed that it has chosen to back the two most established names in the market.”
Rebuilding Society was founded a year ago. Gary Lumby, formerly of Yorkshire Bank, is a director.