The government hopes its backing will be matched by a similar amount from private capital, said business secretary Vince Cable.
The bank would not directly lend to business, but instead support the supply of loans and long-term capital to smaller firms through existing banks and other financial providers, by operating through the wholesale market.
"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," said Cable, who is attending the Liberal Democrat annual conference in Brighton.
‘Can’t get the loans’
"Many new promising, growing companies simply can't get the loans they need to expand on reasonable terms. We are going to help fix this," he added, in a statement released by his office.
Cable is expected to expand on the plans – which he hopes will loosen the lending stranglehold, he claimed, the main high street banks have on businesses – when he speaks at the conference later today (September 24).
Terry Jones, FDF communications director, told FoodManufacture.co.uk he was he hopeful the bank would be a step in the right direction.
“On the face of it this looks like really good news for small food and drink companies. But like everyone else we are waiting to hear more details,” he said.
“There are examples of state-backed banks working well elsewhere in Europe, but I hope this measure will be more user-friendly for businesses than some of the other government schemes we’ve seen before.”
A spokeswoman for The Federation of Small Business (FSB) said the organisation had long called for such an institution to be modelled on the Small Business Administration in the US, set up in 1953. It had helped small firms access finance through a range of loan products.
But it warned that the proposals need to be well-thought through and not rushed if it's going to benefit the economy in the long-term.
The British Chambers of Commerce group welcomed the funding for the new bank saying it would allow "new and growing companies to get access to capital in the same way that they do in Germany, South Korea, and the United States."
It is believed the new bank could be operating within 12 to 18 months.
To read how lack of funding was claimed to be holding back small- and medium-sized food manufacturers, click here .