Local authorities are hoping to lend to small businesses in response to the credit drought.

Several authorities have announced plans to implement a system similar to the one unveiled by Essex County Council last year, which intends to provide loans to local small companies which are suffering from a lack of available credit.

The proposed Bank of Essex will lend finance on a short-term basis of between six to 18 months and concentrate on aiding existing enterprises rather than start-ups.

Lord Hanningfield, the council's leader, explains: 'I am passionate about supporting local businesses through the downturn, as they truly are the backbone of our local economy.'

According to the Financial Times, other councils are hoping to follow suit, with Birmingham City Council discussing proposals to lend to companies, as well as providing loans for homeowners and taking deposits.

In addition, a group of authorities led by Lambeth and Bolton councils are investigating the possibility of lending to boost local economies and looking into possible sources of finance for the scheme.

The Federation of Small Businesses recently called on banks to give their local branches more decision-making powers, in order to build relationship with their customers.

See also: Business planning key to conserving cash