The new "arms-length" institution will receive £1bn of tax-payers' money and aim to make £10bn of finance available to SME borrowers.
It will bring together in one place Government finance support for small and mid-sized businesses. It will also control the Government's interests in a new wholesale funding mechanism which will be developed to unlock institutional investment to benefit small businesses.
It will be professionally run and commercially focused. It will facilitate the provision of loans including long-term capital to UK firms through banks and other financial institutions.
By harnessing the power of capital markets the department for business innovation and skills said it has the potential to "transform" business finance in the UK.
The new institution will operate through the wholesale markets, it will not have any retail presence and will not displace or subsidise banks. Its role is to encourage the development of private sector solutions and enable the market to work properly, not compete with it.
Cable said: “For decades British industry has lacked the sort of diverse, long-term finance that is quite normal elsewhere. We need a British business bank with a clean balance sheet and a mandate to expand lending rapidly and we are now going to get it."
It is hoped that state cash, which will come from existing budgets not extra borrowing, will be matched or exceeded by private money.
In response to the government’s proposal, John Cridland CBI director general said: “By bringing together all existing support into a one-stop shop, and by increasing the supply of capital to firms that want to grow long-term, the business bank has the potential to support lending and help SMEs to grow.
“The bank could also play a vital role in packaging up and selling debt from medium-sized companies, allowing them to access vital finance streams.”
And he added: "The Government must now work swiftly to get the bank up and running so that it can start helping SMEs as quickly as possible."
Exact details about the bank will be made public in the Autumn statement on 5 December 2012.
Philip George, Interim CEO of Shawbrook Bank said,
“Today’s announcement is a very positive step by the government in its efforts to support small businesses and increase growth.
"With every week that goes by, the number of credit-worthy businesses struggling to borrow from high street banks increases. Many thousands of SMEs in this country are being stifled by the lack of credit, and we hope the new business bank will help increase lending so these businesses can once again expand and grow.
“Banks are being criticised for not lending to small businesses, but let’s not forget there are challenger banks like Shawbrook who are already working very hard to plug the gap left by the high street banks.
"Shawbrook launched in October 2011 with a commitment to making it easier and more straightforward for credit-worthy SMEs to borrow, and by the end of this year we hope to have £1 billion of assets on our balance sheet. We’re very proud of our growth since launch, and we believe it demonstrates the real demand among SMEs for a bank that is willing to lend.
"We look forward to hearing more details of the government’s business bank in the chancellor’s autumn statement, and hope to play our part the scheme.
"In the meantime, we will continue to fulfil the promise we made when we launched last year and provide no-nonsense lending to hard-working businesses and individuals around the country.”
Paul Aitken, CEO of borro, added: "Britain prides itself on its entrepreneurial spirit, but the sad reality is that the financial downturn has caused - and continues to cause - short-term financing issues for SMEs.
"Entrepreneurs country-wide wait to see if there will be a return to mainstream sources of finance following today's announcement from the business secretary.
"The Business Bank should inject some hope into small and medium sized businesses however, so many initiatives have been promised that have failed to meet the objectives set, that the Government will need to put its money where its mouth is.
"In the meantime, we know that currently around sixty per cent of borro's customers are small business owners. These individuals have helped secure their business' future through loans offered against their personal assets such as fine art, fine wine and jewellery; an alternative solution for helping a business through both periods of irregular cash flow and growth."
