Banks are in the dock again – this time over lending to business. The trust between small business and banks has never been strong – now there is pressure to fix it. But there is more to it than that. Big business can do more to help, too. But actually, if you dig beneath the surface, entrepreneurial business really needs something more profound.

Here is an interesting tip for some readers of this publication who may be juggling with cash flow. If you provide work on a subcontracted basis for one of those large utility companies or phone companies that you happen to also use as a supplier, then see if you can manage this.

See if they will write off your gas or electricity bill, or telephone bill, or whatever it is your client also supplies to you, from your fee.

So, if you work for, say, a large telephone company and they owe you £3,000, and normally take, say, 3 months to pay their invoices, but you owe them £500 for your phone bill, see whether you can just reduce the amount of money they owe you to £2,500 and write the phone bill off.

Okay, we will save you the hassle, it won’t work.

For many of the small businesses that make up the UK economy, cash flow, rather than profit and loss, is what counts. And it often seems that the bigger the client, the slower they are to pay.

Lloyds Bank has entered the debate, all guns firing, proclaiming its small business credentials. It says the government needs to put a little less pressure on the banks to be business friendly and instead look at the behaviour of big business.

John Maltby, the managing director of Lloyds TSB’s commercial bank asked: “What is happening to get more attention on those businesses not paying on time?”

If, by some miracle, the government manages it, and somehow the endemic attitude we have in the UK to drag out the payment of invoices changes, it will be a massive boost for small businesses.

While it was at it, Lloyds also revealed its own six-point charter for business.

As you know, one of the real problems many businesses have with their bank is that trust thing: the constant fear that the bank may suddenly, and apparently quite arbitrarily, cut the overdraft just at that point when it is most needed. So Lloyds has announced six measures, all designed to provide the kind of services that, actually, one would normally expect. So, for example, cuts in interest rates announced by the Bank of England will be passed on; there won’t be changes in overdraft facilities during the period of the agreement; and when the overdraft agreement comes to an end, the bank won’t try and make changes to the terms if the agreement is then renewed. But this is the big one: Lloyds TSB says it will “agree to any reasonable request for short term finance and do what we can to support any viable business through temporary difficulties.”

The government’s other big bank, RBS, is making similar promises.

Of course, it is quite sad that this proved necessary. Trust has never been strong between banks and their small business customers – and it seems that it has taken this crisis to try and fix that.

This lack of trust also explains, in part, why there has been such an angry backlash against banks. Many entrepreneurs know what it is like to be let down by their bank, to have lending facilities reduced at the point when they are most needed. In some ways this has been a major problem with the UK for many years.

However, as has been argued here before, we can criticise the banks, but the real problem for entrepreneurs is that if they run a truly innovative business with bold ideas, then bank funding is essentially a flawed concept.

Most new businesses fail, therefore if banks were to support most new businesses, most loans would go bad.

Usually, however, more money is made by the handful of successful new businesses than is lost by the failed enterprises.

But banks get their remuneration via the interest rate they charge on the loans they provide to firms, so they don’t enjoy an especially high return on the loans they make to the handful of really successful businesses to compensate them for failed businesses.

That is why debt financing for small entrepreneurial businesses never makes sense.

But for the economy as a whole, the more entrepreneurial businesses there are, the better, because when companies do succeed, the benefit they bring in terms of creating jobs and paying tax can be highly significant.

That is why a change is needed in the way entrepreneurial businesses are funded.

The UK is capable of innovating its way out of this crisis. Creativity and imagination within the workforce is there.

But creativity and imagination is required from the government, too.

That is why the policy of supporting the economy via attempts to boost spending is flawed. It is hard to see how a cut in VAT from 17.5 to 15 per cent is going to make that much difference. After all, retailers are slashing prices by 20 per cent or more. Smaller retailers agree that the administration cost of implementing the VAT cut virtually cancels out the benefit. But the real snag with the cut in VAT is that the money just goes – it disappears.

If the UK is going to borrow its way out of recession, this only makes sense if the borrowed money creates something that will generate benefits years ahead.

But the politicians and economists who determine policy really have little idea of what it is like to be an entrepreneur – they have little idea of the difficulty involved in predicting which businesses will succeed and which will fail; they have even less of a clue about the randomness of innovation.

The Law of Unintended Consequences should be one of the most important laws in all economic text books. If you fund a small number of businesses you have no idea if the strategy will work, but if you provide funding to thousands of businesses you can be sure some will be very successful indeed – the Law of Unintended Consequences is unpredictable on a micro basis but predictable on a macro basis.

Only by understanding these principles will the government be able to orchestrate a true economic recovery.