The Government will invest £1 billion to open a new bank in 2013 and put up £10 billion worth of guarantees to attract private funding.
The bank will offer long-term loans of up to 20 years and lend to small and medium-sized businesses.
Business Secretary Vince Cable said that the government is “unlikely to set up branches around the country and it won’t be civil servants running it,” at a committee meeting in Westminster.
He said that the Business Bank will most probably be opened in small banks with a focus on personal relationships, suggesting the Co-operative Bank or Aldermore.
Dr Cable joked that he was the first secretary of state to introduce two state banks, the other being the Green Investment Bank, and said there is clear commitment to setting up the Business Bank.
Cable stated that there is a “big gap in market” for lending to small and medium-sized businesses after “banks moved away from traditional relationship banking where good business proposals could gain credit.”
After saying that RBS hasn’t changed enough to help SMEs the Business Minister slammed high street banking as being dominated by “fairly young people trying to get a bonus and flog insurance.”
Britain had 47,777 overdraft and loan applications worth as much as £ 2.5 billion rejected in the first six months of 2012, according to research by Cambridge & Counties Bank.
With business lending falling by 5% last year to £429bn according to the Ernst & Young Item Club, Cable admitted that a clear framework needs to be in place before the end of the parliamentary term so that the next Government has something to build upon and cannot sweep it away. However the Business Bank will also need clearance from the EU in Brussels.
There is strong support among small and medium-sized companies for the Business Bank, with 48% expecting it to increase levels of investment in their businesses according to an independent study by The Open University.
“Clearly there needs to be more innovative channels of obtaining capital other than from just the bigger banks,” said Gary Wilkinson, CEO at Cambridge & Counties Bank.
“The new British Business Bank and today’s announcement of a cut in corporation tax shows that the Government is being proactive in the SME space.”
The Business Bank will also be tasked with providing wholesale finance to new and growing bank providers such as the Co-operative Bank, Metrobank and Aldermore, and offer a one-stop-shop for government schemes. It is hoped that the Business Bank will put companies in front of available credit and finance schemes that are currently underused.
William Chase, founder of Tyrrells crisps and owner of the single estate Chase Distillery in Herefordshire said that “It’s vital that government creates a lending stream for business as there are no schemes which particularly support proven exporters.”
Mr Chase commented that Government backed schemes that provide much needed finance for SME’s should favour proven or potential exporters.