Small and medium-sized businesses may soon be able to borrow money at more competitive rates, under a $2 billion federal government plan to boost the funds available to smaller lenders.

The money will be injected into the small banks and non-bank lending market in the coming years through a new Australian Business Securitisation Fund.

The initiative will mean more competition in the business loans market, currently dominated by the big banks which account for more than 80 per cent of loans that are less than $2 million.

The taxpayer-backed fund will buy packages, or securitisations, of secured and unsecured loans issued by small lenders, thereby giving them more money to lend out - at potentially lower interest rates.

Small businesses currently pay borrowing rates of up to four percentage points higher than those for home loans.

"We want small business - more than three million of them - across the economy to get access to affordable finance," Treasurer Josh Frydenberg told reporters in Melbourne on Wednesday.

"More competition, more liquidity, stronger securitisation markets, will ensure lower rates for doing business."

Small businesses can also find it difficult to get financing without offering security such as real estate.

The new fund arrangement should address that because it would support both secured and unsecured loan markets.

Labor is open to the idea but shadow treasurer Chris Bowen wants to see the details to ensure all the right checks and balances are in place.

The Australian Business Securitisation Fund is expected to be operating by 2019 and will be overseen by the federal government's debt portfolio manager, the Australian Office of Financial Management.

Mr Frydenberg said the fund would be classed as an asset, won't increase the nation's net debt burden and will support the growth of Australia's securitisation bond market.

Prospa, Spotcap and Judio are among small lenders to have swiftly praised the step.

"High costs of capital for lenders like Prospa directly impacts interest rates and the availability of affordable finance for small business," Prospa chief executive Beau Bertoli said.

The coalition is also encouraging financial institutions to establish a private-sector Australian Business Growth Fund, to help small businesses access longer-term equity funding.

This would involve banks taking a stake in a business, enabling it to grow without taking on debt or giving up control.

Similar funds are already in place in the United Kingdom and Canada.

The establishment of an Australian version requires the Australian Prudential Regulation Authority to loosen the current arrangements governing the treatment of equity for bank regulatory capital purposes.

Mr Frydenberg will meet with regulators and stakeholders to discuss the fund at a roundtable later this month.

Small business ombudsman Kate Carnell says the new securitisation fund will go a long way towards to addressing the finance needs of the sector and has urged all lenders to back the creation of a growth fund.