Cable reveals plan for £1bn bank to help small business

Coalition agrees to fund manufacturers directly after pleas to high-street lenders fail

Vince Cable’s new bank will be up and running within 18 months and hopes to lend £10bn (Getty Images)

Plans for a new business bank, backed by £1bn of Government money, to get funds flowing to cash-strapped small companies will be announced today by Business Secretary, Vince Cable.

The move has been agreed by the Coalition in frustration over the failure of the major high street banks – despite the taxpayer's large stake in two of them – to advance credit to manufacturers. They have been widely accused of hoarding cash in an effort to build up their resources.

Mr Cable has won agreement within the Government that the new bank would only have an impact if it is supported by state money. However, there will be questions whether the cash will ever be enough to help revitalise small and medium-sized firms facing years of weak economic growth.

Under the Business Secretary's initiative, to be spelt out at today's Liberal Democrat conference in Brighton, the British Business Bank will be operational within 18 months.

Mr Cable hopes it will be underwritten by a further £1bn of private sector money and be able to support £10bn of lending when fully operational. He will say: "Many new... companies simply can't get the loans they need to expand on reasonable terms.

"Manufacturers, exporters, start-up companies are struggling to finance growth. We are going to help fix this."

The Business Secretary's allies said today's announcement was a "significant victory" for him, pointing out the Treasury had envisaged the bank simply pulling together existing lending schemes and was anxious about further spending commitments. Liberal Democrat sources said the £1bn that will underpin the new bank will be found from elsewhere in Government spending, but said the savings that would pay for it would not be identified until Mr Osborne's Autumn Statement in December.

The British Chambers of Commerce said the Government's "decisive step" would help thousands of companies to expand, but said it should be followed by further injection of money.

And last week the IPPR think-tank said the planned new bank would need to be supported by £40bn to boost lending significantly to firms.

The new bank's cash will not be channelled directly to companies but through "challenger" banks such as the Co-operative, Handelsbanken and Aldermore. It will be run at arm's length from the Treasury.

Its aim is to try and by-pass the established banks, which critics say are culturally cautious about long-term lending to small companies in such sectors as the digital economy and green energy.

A Government-backed taskforce, led by the former chief executive of Legal & General, Tim Breedon, called in March for a German-style single agency to stimulate lending to small business.