Small business owners will be given a $2 billion lifeline in a radical federal government intervention to heighten competition with the big four banks while offering more options for companies that can struggle to secure loans.

Treasurer Josh Frydenberg will set up a major new fund using Commonwealth debt to inject more finance into the small business sector, vowing to help a part of the economy that employs more than seven million workers.

The scheme, to be announced on Wednesday, will adopt the same model Labor used to back $16 billion in mortgages during the global financial crisis but will restrict the funds to small companies, in what is an unusual intervention for a Liberal government.

In a separate move, the government will also overhaul banking regulations to encourage the banks to put money into a "growth fund" that will back small employers, copying a fund in Britain that has grown to $2.7 billion.