If you haven’t heard of the Bank Referral Scheme, the short explanation is that it’s a Government-mandated scheme that requires the major banks to refer their rejected business loan applicants to designated finance platforms. These platforms then help them find an alternative lender who may be able to lend to them — and the referred business is in control of the whole process. So how does it help UK businesses, and how does it work?
The wider context
It’s worth briefly explaining the Bank Referral Scheme in context before we look at the detail.
After the credit crunch, bank lending to SMEs was significantly reduced. Contemporary surveys repeatedly showed that when an SME was rejected for finance by their business bank, the most likely outcomes were that they would give up entirely, or use personal credit cards or friends and family to finance their business.
This situation was and still is harmful to the economy, because access to capital is a strong indicator of future growth. Without it, businesses are forced to slow their growth to mediate the risk of overtrading, perhaps turning down contracts that they couldn’t afford to self-fund before reaping the benefit.
In cases where getting finance is a matter of survival, this often leads to the unnecessary closure of businesses that are viable but lack the working capital needed to continue trading.
Finding the alternatives
Because of this lack of lending to smaller businesses, a huge variety of alternative lenders has sprung up since the credit crunch, and there’s now a lot of choice on the market. The trouble is, these alternative lenders and SMEs struggle to find each other, and many business owners simply don’t know there’s an alternative to the bank.
In a nutshell, the Bank Referral Scheme is designed to fix this problem, by helping businesses and alternative lenders find each other.
How does it work?
Broadly speaking, when a bank rejects an applicant for business funding, the bank must offer a referral to a designated finance platform. This was passed into law as part of the Small Business, Enterprise & Employment Act 2015, and latterly as part of The Small and Medium Sized Business (Finance Platforms) Regulations — an important detail that means the banks are required by law to offer a referral.
If the customer wishes to be referred, the bank passes on details of their requirements — with their permission — to a designated finance platform. My company Funding Options is one of the designated finance platforms, and there are two others, Funding Xchange and Bizfitech.
Once we’ve made contact with the referred business, we’ll help them find a suitable lender from our panel that includes dozens of providers across the whole market. SMEs can also ‘self-refer’, and start the process with a designated finance platform without a formal referral from their bank. In both cases, the referred business’s details aren’t sent to alternative lenders without their explicit permission.
Why is the Bank Referral Scheme important?
Each year, hundreds of thousands of UK firms don’t fit mainstream bank lending criteria. Government statistics show that most SMEs spend less than two hours researching their funding options, and two-thirds only approach one business finance provider — meaning that trusted gateways are essential in helping them navigate a complex and varied market.
Availability of finance for smaller businesses also has a significant impact on the economy — a recent report by Cambridge University’s Centre for Alternative Finance and GLI found that £20bn is lost to the economy every year because of a lack of awareness of the alternative business funding options available.
With the Bank Referral Scheme, in many cases SMEs are successfully placed with an alternative lender within a few working days of being rejected by the bank. One of the common bugbears of SME decision-makers rejected by the bank is that it can take weeks to get to the eventual ‘no’ — by using designated finance platforms, they’ll get a decision much faster, whatever the outcome.
The bottom line: since it launched on 1st November 2016, the Bank Referral Scheme has been successfully funding businesses all over the country that couldn’t get finance through their business bank — which has wide-reaching positive implications for the UK economy.
Conrad Ford is chief executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions