The Enterprise Capital Fund's creation will lead to £25 million being invested into smaller firms in the science, technology and engineering sectors by Westminster.
And an extra £15 million is expected to come from private investment as part of the Seed Enterprise Investment Scheme, set up to encourage people to put money into new enterprises.
Business and Enterprise Minister Michael Fallon said that the move is designed to make the UK the best country in Europe "to start, finance and grow a business".
"Helping entrepreneurs to access a diverse range of finance options is vital," he noted.
"The new £40 million Enterprise Capital Fund will address a gap in the market and help our small businesses find the finance they need to realise their potential."
It comes after hundreds of new jobs were created in the north-east in the latest round of Regional Growth Fund investment.
Posted by Thomas Fletcher