So called ‘peer-to-peer’ finance companies, which directly link savers and investors with small businesses, have been invited to submit proposals on how they would use taxpayers’ money to boost lending to entrepreneurs.

The Government’s backing for “non-traditional lending channels” represents a significant boost for a tiny market – the largest player in the space, Funding Circle, has facilitated £34m of lending since it was established.

A further £400m is being put out to tender for fund managers which lend directly to medium-sized businesses.

The combined £500m forms the latest tranche of the the Business Finance Partnership, which sees the Government match fund investments alongside pension and insurance funds.

David Gauke, exchequer secretary to the Treasury, told Your Business: “The Government is doing everything it can to open up as many finance options for small companies as possible.”

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In an effort to boost an ailing economy the Government has pledged £100m of taxpayer's money to peer to peer finance companies and has invited them to submit proposals on how they would use this fund to boost lending to entrepreneurs.

These so called peer to peer finance companies link savers and investors directly to small businesses and companies but up until now have only occupied a fractional space in the lending market. The largest player, Funding Circle, has facilitated the sum of £34m of lending to 702 small businesses since it's inception in 2009

In addition to this £100 million pledge a further £400m is being put out to tender to fund managers who lend directly to medium sized businesses.

This combined total of £500m represents the clearest indication yet of the Government's intention to honour their commitment to the Business Finance Partnership which sees the Government match investments alongside pension and insurance funds.

In a recent interview, David Gauke, exchequer secretary to the Treasury, stated that, “the Government is doing everything it can to open up as many finance options for small companies as possible."

He added that the Business Department was “looking at the right protections” for savers since the peer-to-peer market is unregulated.

“There is a need to strike a balance between investor protection and opening up the opportunities for business.”

Funding Circle Ltd., one of the companies which qualify to apply for the funds available to alternative lenders which service companies with revenues of less than £75m, confirmed it would apply for part of the £100m on offer.

Samir Desai, Co Founder of Funding Circle Ltd said that, “We actually see it as quite a small amount of money compared to where we believe we can get to. We’re doing more than a £1m a week in terms of lending. There’s a lot of potential to grow the business and these funds would just help us fund more loans.”

Anil Stocker, co founder of Market Invoice, an ‘eBay for invoices’ website for small firms, will also submit a proposal as e confirmed that, "We've always said the biggest barrier to alternative finance is awareness, so the Government standing behind the non-bank lenders shows we mean business and we can reset the funding landscape."

Following Brussels agreement to the expansion of incentives for backers of small businesses, the Treasury have now also confirmed that ‘angel investors’ in growing companies will receive a tax break worth an estimated £125m

The Government is hoping the EU’s clearance of its “huge expansion” of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) will provide an additional £240m a year in capital for small companies by 2016.

Under both schemes, businesses employing up to 250 staff will now qualify, up from the previous limit of 50, while companies are now allowed to take up to £5m in investment a year, rising up from the previous £2m.

This is still short of Chancellor George Osborne's promise of a £10m investment limit, but this was halved in this year’s budget. It is thought the revision was designed to ensure the changes didn’t fall foul of EU state aid rules.

Brussels also cleared an increase on the EIS and VCT gross assets limit of qualifying companies from £7m to £15m leading Mr Gauke to conclude that Britain now has the most generous tax regime for backers of small firms of any country in the EU.

“This will make a big contribution to driving growth,” he said. “The fact that the scheme has gone from 50 employees to 250 employees means it covers an awful lot of businesses. It will bring more investment [from existing angel investors] and new investors are now likely to see backing small businesses as more attractive.”

Mr Gauke added that investors’ concerns that ‘seed EIS’ – an extension of the EIS scheme to encourage investments in start-ups launched last month – is ‘stalling’ are unfounded.

“HM Revenue & Customs has been inundated with enquiries from early stage companies. The early stages are encouraging.”

The changes to EIS and VCT are expected to cost the Treasury an annual £125m by 2016.