All credit to the Chancellor, Rishi Sunak, who has been quick to respond to fears that thousands of small businesses would go bust unless the banks up their game in providing them with emergency loans.

As we too, at Reaction, have been warning since the emergency scheme was first announced, the UK’s high street banks and lenders on the list for the Coronavirus Business Interruption Loan Scheme have been found wanting. They have been slow in administering the loans, have demanded personal guarantees when they should not have done and been persuading some companies to go for regular commercial loans rather than the emergency scheme.

No surprise then to discover that since the Treasury introduced the scheme, only 1,000 loans out of 130,000 applications have been approved and that just £90m of the billion-pound package under the CBILS have been agreed.

Yet the whole purpose of the CBILS was to provide UK businesses with turnover of up to £45m with emergency loans of up to £5m to stop them from having to lay-off workers or indeed close down. Backed by the government with up to 8-% guarantees, the loans are interest free for the first 12 months and fees are to be paid by the government.

The problem is that banks are risk averse creatures. They are more interested in lending for mortgages and property and not to small businesses which are volatile by nature.

They are also publicly listed and privately owned companies by their shareholders. Apart from Royal Bank of Scotland, of course, which is still partly owned by the taxpayer.

Even with such generous government guarantees, they do not like the idea of potentially losing 20% of these loans and they were dragging their feet. In one sense, you can hardly blame them.

Fortunately, Sunak has wasted no time in putting a stop to such dilatory behaviour. Lenders have been told they must not ask for personal guarantees for loans under £250,000 and that all companies applying must be offered the new government-back scheme.

The Treasury has also had to adapt its plan to offer a new loan scheme for businesses with revenue between £45m and £500m, the middling sized business which had been missing out in the emergency package as they were deemed to be too big to apply for the loan scheme and too small for the government debt-buying programme for larger companies.

It is too early to know at this stage whether the Chancellor’s entreaties will persuade the banks to be more open or generous with their lending to UK business. There’s no question they should step up in such extreme circumstances. Who knows, it may even give them the taste for getting back into helping Britain’s middling to big companies grow.

There is another huge gap in the market which needs fixing fast by the Chancellor. That is the storm which is facing the UK’s start-ups and early stage companies which depend on high net worth individuals, venture capital, equity crowdfunding and the three fs – family, friends and fools – for their seed capital and further rounds of finance.

There are thousands of them, and these are the companies which are struggling most during this crisis as private investment has all but disappeared over night. Ironically, these are the companies, many of them in the most innovative life science industries and other high value tech sectors, which will provide most of the future growth once we emerge from this horrendous crisis.

It’s estimated that £2bn was invested into these companies last year through a mix of high net worth investors and venture capital. But since the start of this lockdown, the Enterprise Investment Scheme Association estimates that the flow of money has crashed by almost 60%. As this is the busiest time of the tax year, that represents about £500m of lost investment.

It’s a similar tale in equity crowdfunding which saw £500m worth of capital funding into companies last year.  Since the outbreak started, that investment has fallen by 75%.

If these companies are allowed to go bust, the next generation of Britain’s young businesses will be wiped out. These companies, most of which bank with the new wave of alternative lenders such as Revolut, Starling and Silicon Valley Bank which are not on the government’s list of lenders, are also unlikely to succeed even if they applied for the CBIL loans.

What these companies need most though, is equity not debt finance as they would struggle to pay off the loans – even if they got them – because they are still in early stage of development.

The irony is that there are thousands of wealthy people in the UK with capital on their hands not knowing what to do with it now, and how to best find a productive home. Which is why the Chancellor needs to start looking at ways of keeping private capital flowing into these companies with the most attractive tax reliefs possible.

There is one obvious and easy-peasy route to achieve this mis-match between supply and demand. The Treasury should look at temporarily raising the income tax relief credit to 50% for EIS and 70% for SEIS. At the same time, it should also increase the SEIS investment threshold to £250,000 and to £5 million on the EIS.

Over the years the EIS and SEIS schemes have been responsible for about £20 billion of private investors’ money flowing into around 27,000 businesses. That is a phenomenal amount, and these high net worth individuals have taken a risk with their wealth and backed some of the UK’s fastest growing companies which have provided so many thousands of new jobs and, therefore, tax revenues for the government.

To my mind, raising the tax incentives for start-ups and early stage companies is a no-brainer. There are other changes that are needed by venture capital houses which are also sitting on mountains of cash but are bound by EU rules that they cannot invest in certain categories.

It might well be that the more pointy-heads in the Treasury would resist such moves to raise tax relief for political reasons. They might resist because they fear such a measure would be seen to be giving tax-breaks to the already rich at a time of such penury for so many.

That would be a foolish and short-sighted analysis. Far better, surely, to entice the wealthy risk-takers to invest in the next generation of businesses than pour their money on flashy new cars or more property after the crisis?

At the latest count, there are about 500,000 people in the UK considered to be HNW: that is someone with assets of more than £100,000 to hand.

So far, only 32,000 of them actually claim tax relief through these two schemes so there is a lot of headroom. Getting more of these super-rich to part with their wealth to risk their capital must be better than letting these small companies bite the dust.

And these private individuals are taking a risk with their money: many of these ventures will fail, and they will loose some of their investment. It’s estimated that up to eight out of ten star-ups fall by the wayside.

Raising tax incentives is also a simple cost-benefit analysis. If these young start-ups and early stage companies have to lay off staff – which is happening – it is the taxpayer who will pay the cost because they will then apply for Universal Credit and the other emergency schemes available. Instead, let the wealthy support them now and they can take on more staff and grow later.

Mark Brownridge, chief executive of the EISA, is deeply troubled by the drop-off in private investment flowing into the UK’s most promising companies. Behind the scenes, Brownridge has been canvassing his 160 members from the investment community to get a better feel for their state of mind, and the state of their wallet, to find out what would give them the confidence to come back and start investing again. He is collecting the data, which he will be feeding into the Treasury next week to persuade the Chancellor to take a risk and put up the income tax relief and the thresholds for investment.

With any luck, Sunak, who has been in business himself and who is married to the daughter of one of India’s wealthiest IT tycoons, should understand the logic of this. This way round the money spent on upping the tax relief will be more than repaid by the tax revenues earned in future years. Sunak needs to allow more skin into the game. Skin made of equity, as a result of investment, not debt.