The bank, which was announced last September, is being established specifically to target the problem of inadequate access to finance for SMEs that numerous government finance initiatives have so far failed to get to grips with.
Business secretary Vince Cable called this problem "one of the biggest risks to economic recovery". "We need bold action to fix what has always been a weakness in the UK economy, and since the financial crisis has become an urgent problem," he added.
"The Business Bank is not just a response to the deep structural downturn the UK faces… it is a core part of a new Industrial Strategy, the essence of which is long term support for long term growth and investment in the UK.
"It is also integral to the government’s ambitions to promote diversity in the business finance markets. The UK is now the only G8 country without an institution of this type and it is simply not acceptable for us to fall behind our competitors in this way."
In a strategy update published by the Department for Business, Innovation and Skills (BIS) last week, the government highlighted the fact that SME lending has fallen 25% in real terms since its peak in 2009 and is now almost 10% lower than in 2006.
The UK also has the lowest share of gross investment in tangible goods by SMEs (businesses with a turnover up to £25m) of any EU country at 38%, while loan rejections in the UK in 2011 were twice those in France and Germany.
While the majority of the fine detail has yet to be decided, the government has identified the areas it feels are most in need of new interventions to support early stage and long term capital.
These include businesses with little or no track record, seeking loans up to £25,000 and providing long term growth finance solutions for companies looking to borrow £2m upwards. In addition, greater awareness of existing government schemes to support lending in the mid-market is needed.
The BIS, which will be responsible for launching and operating any new programmes from now until the launch of the Business Bank in the second half of 2014, has identified the need to develop capabilities in equity, debt and wholesale solutions for SME finance markets.
Its proposals include an extension to the Enterprise Finance Guarantee scheme - including both the number of finance providers (currently 43) that support the scheme, and the businesses and level of loans the EFG will support.
Future enhancements could include measures to fill the gap in the UK mezzanine finance market - useful for high growth firms - that used to be fulfilled by the likes of 3i.
In addition to consolidating £3.9bn of existing and new government capital, which will work alongside private sector contributions, the Business Bank will also aim to boost awareness amongst SMEs of the various government support programmes.
The BIS has categorically stated that the Business Bank will lend on commercial terms and that it "will not directly invest in businesses nor use taxpayers’ funds to prop-up businesses with little chance of success".
Rather, it will work with the private sector "to support and increase the capacity of current channels of finance, rather than simply replace private sector provision".
