There have been constant complaints from small and medium-sized businesses in recent months that banks are blocking access to finance and thwarting their ability to develop.
The new business bank, which is to be set up with public cash, will use the funds to lend up to £10bn to companies and is the scheme aimed to challenge the “British curse of short-termism”.
The British Chambers of Commerce welcomed the announcement, saying that six in 10 firms would feel more confident if there was a state-backed business bank.
Director General of the British Chambers of Commerce, John Longworth, said:
“The Government has taken a decisive step toward the creation of a British business bank by committing real money to get it off the ground.”
The specific details of exactly how the bank will work are still being drawn up and will be announced in the autumn statement on 5 December according to Lib Dem officials. However, it is expected that the Government will invest up to £1bn, which will be matched by private investors. It will also look to borrow a further £8bn on the back of this money.
Cash will then be lent to financial institutions, offering longer-term finance to entrepreneurs and small firms.
The scheme is based on state-backed banks in Germany and America; however it is one step short of the Government creating a bank that lends directly to firms. Past schemes, such as the £60bn funding for lending programme, have relied on taxpayer guarantees to banks.
Vince Cable claims that the business bank will be a “lasting monument” highlighting the need for major reform of the banking system in the midst of the credit crisis.
He will announce:
“We need a new British Business Bank with a clean balance sheet and an ability to expand lending rapidly to the manufacturers, exporters and high-growth companies that power our economy.
“I am working with the Chancellor to develop a state-backed institution that will combine up to £1 billion of new government capital with a larger private sector contribution.
“This will then apply further leverage through guarantees to support up to £10bn of finance to SMEs, and mid-sized business – a significant portion of all the lending available.”