What to expect from the bank referral scheme

According to figures from the British Business Bank, approximately 100,000 small and medium business finance applications are declined by banks each year, which is one of biggest drivers for the introduction of a bank referral scheme. Boost Capital's Alex Littner outlines what SMEs can expect with the scheme coming into effect

How quickly two years pass.

In August 2014, the former Chancellor George Osborne announced plans to introduce a bank referral scheme matching SMEs rejected for bank lending with alternative providers keen to do business with them.

Now, two summers, one raft of enterprise legislation, and a change of personnel at the top of Government later, and this potentially revolutionary scheme will soon come into being.

And the ramifications for small firms – as well as the altfi industry that serves them – will be great.

Time for change

It’s not before time, since small businesses continue to face barriers when trying to gain access to finance, both from the banks – as highlighted in the recent Competition and Markets Authority (CMA) investigation into retail banking– and from a lack of awareness on SMEs’ part of new funding options available through fintech channels.

At a time when big financial institutions like RBS and NatWest are threatening to charge business customers just to deposit money, it’s clear mainstream providers are not always working in SMEs’ best interests, or adequately serving their day-to-day needs.

The high street banks have a stranglehold on business lending by virtue of holding most businesses’ operating accounts. Serious change to how small and medium firms are financed – and have their finances managed – is long overdue.

Which makes the referral scheme more timely than ever.

As does the recent referendum vote for the UK to leave the European Union. Introducing this type of referral process was always intended to make small business financing as recession-proof as possible. It is intended to reduce the dependency of small enterprises on the mainstream banking sector.

We all know that during the last economic downturn the banks turned off the money supply to their smaller business clients.

Should another recession occur as a fallout from the Brexit decision, as many expect, SMEs should still be able to identify alternative funding options via the new finance matching service, even if bank capital dries up.

Revolution coming

Experts insist the scheme will be up and running this year, sooner rather than later. And the CMA report, which was published in early August, highlighted why this is so important – almost two out of three SMEs only ever consider one provider when looking to borrow, and that was most likely to be their bank.

It also pointed out the way banks price their lending to small firms is opaque at best, bafflingly inconsistent at worst, making it near impossible for business owners to compare the price of borrowing from different providers, even if they were inclined to shop around.

Not only will the referral process introduce these enterprises to lenders with the resources and inclination to provide capital, it will operate through aggregator platforms that make comparisons easier.

One of the CMA’s core recommendations – improving competition in business finance – will take a significant step forwards as a result.

Conrad Ford runs Funding Options, one of the three online platforms chosen so far to provide the matching element of the referral scheme, along with Bizfitech and Funding Xchange. He believes tens of thousands of businesses will be helped by the new system every year.

The figures could be even higher, but what is certain is that these new rules of engagement for the banks will open up funding for a significant number of businesses.

In a recent conversation I had with him about the scheme’s imminent launch, Conrad admitted he was excited, adding: “The referral process will give SMEs a safer zone to access finance. I really believe this scheme will sow the seeds of a funding revolution.”

Speed of delivery

A funding revolution is what many of Britain’s businesses want – and deserve. And I, too, believe that the referral scheme could be the catalyst to bring about this overdue change of order. One of the fears I expressed in the past was that the process would only refer on businesses rejected for loans once they had been through the banks’ own lengthy appeals procedure.

This would have reduced the number of companies eligible for help to a tiny number, as well as adding weeks or months of waiting to an already lengthy application process.

Now that the details of the scheme have been thrashed out, I understand this won’t be the case, which is a great relief. Instead, unsuccessful applicants will be submitted for referral to outside lenders at the same time they can appeal their bank’s decision.

This vastly increases the number of SMEs alternative funders can potentially reach, which is extremely welcome.

Not giving up

The banking giants admit about 150,000 small and medium businesses are rejected for bank funding every year, while some business groups put the figure nearer 250,000.

Whichever is true, many entrepreneurs recognise the possibility for a referral process to improve their chances of borrowing much-needed growth capital. About four out of ten say they would use the referral scheme if they were unable to get finance from their bank, British Bankers Association research suggests.

Certainly, fewer will give up their search for funding after falling at the first hurdle, as currently occurs.

Those of us working in the altfi arena know there isn’t a lack of supply of finance for businesses in the UK.

Even if the banks decide to close their loan books, there are other providers with the appetite and resources to lend, whether it’s fintech funders or challenger banks. The problem is they’re not reaching enough SMEs at present.

The bank referral scheme has the potential to change that, improve trust in our relatively nascent industry, and introduce more businesses to the wealth of funding options now on offer. This revolution will be digitised – but the rewards it could bring small businesses across Britain will be tangible and real.

Alex Littner is the managing director of Boost Capital.

Praseeda Nair

Praseeda Nair

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.

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