The National Loan Guarantee Scheme will be aimed at businesses with a turnover of less than £50m.
Osborne said the scheme will be up and running in the next few months, with an initial cash injection in the first two years of £20bn.
A total of £40bn will be available for the scheme, which the government will channel through banks to offer to firms through business loans.
The Chancellor told the House of Commons he expects the move to cut small businesses’ lending costs by 1%.