Have you been asked to consider the Bank Referral Scheme? The last-chance finance saloon was launched by the Government to inject competition into the SME lending market and help cash-strapped SMEs secure funding. Five years on from its inception and the scheme has become a menace to SMEs. It must be shut down.
Imagine this: you’ve approached your bank for more financial support, a loan, to help you develop your business and offer new products or target new markets. The bank manager appears to have been supportive and, after understanding the requirement and the business themselves, has followed standard procedure and made an application to the credit committee.
While you await the final green light, you are anxious to get started. You may be tempted to put some of your growth plans into action. Discussions with the bank rumble on as your bank manager tries to get the loan underwritten. You are required to send in more paperwork to support your application. Then, after weeks – perhaps months – of waiting, the application is rejected.
It can be a crushing experience, leaving you deflated and disappointed. On top of that, the pressure is on because you made some premature investments and now your cash flow has taken a beating. Having been left out of pocket, you are left asking: what next?
The bank then offers up an alternative solution – the Bank Referral Scheme.
The bank will ask to share your details with other lenders, as these may then be able to help you instead. If you give your permission, a myriad of other institutions, the vast majority of which you’ve probably not heard of, could offer you the finance you need. And it will be quick.
Sure enough, if you agree, you could be offered the loan you require, within 24 or 48 hours. What a result! Except… what if the rate is extortionately high?
If you’re in this position because you were counting on a bank loan, imagine how tempted you would be to accept a quick offer from another lender?
The Bank Referral Scheme puts SME owners under intense pressure. After experiencing delays and setbacks with their first finance application, this apparent “lifeline” may be tempting, but it is a red herring.
Who would be in the right frame of mind to make an objective yet fundamental decision about funding – whether it is affordable or appropriate for their needs – in these circumstances?
Rollercoaster of emotions
Any entrepreneur excited about the chance to grow their business, who’s planned for weeks and months only to be turned down, yet offered it moments later, would struggle to look sensibly and revisit their strategy. What a roller coaster of emotions we’re asking them to manage.
The Chancellor announced the Bank Referral Scheme in August 2014 and it was launched in November 2016. The plan was to force some competition into the SME lending market post credit-crunch, a time when finance was much harder to come by.
However, in the past five years, the market has changed considerably, and supply of finance is not as restricted as it was.
‘To tempt business owners with seemingly last-resort external finance is like offering an addict their drug of choice’
Rather than support smaller British businesses to gain finance, the scheme is totally misguided. To put business owners under intense stress and pressure, then tempt them with seemingly last-resort external finance, even if it is at pay-day lender rates, is like offering an addict their drug of choice — and expecting them to walk away.
Entrepreneurs are typically emotional people. If they didn’t have the drive, resilience and the ability to take risks, they wouldn’t be self-employed. You don’t experience many small companies with large boards of highly experienced directors making rational decisions in monthly meetings. This segment of society tends to trust its gut and go with it.
We know from Treasury figures that in the first 20 months of the scheme, between November 2016 and June 2018, 19,000 funding applications from SMEs were turned down by high street banks. And, out of the 900 successful applicants referred on to the Bank Referral Scheme, the average loan was just £17,285.
But with several online lending platforms popping up on the internet, acting as brokers for businesses, the serious concern is that many more businesses have found these websites themselves and accessed these lenders anyway, outside of the scheme. Does that mean that our businesses are taking much higher risks?
There are also justified concerns that such lenders could impact the long-term viability of the business, particularly if it is having to service interest of 2pc a month. Some businesses could stand that margin, but not many.
‘This is a danger to the whole economy if left unchecked’
This flawed initiative from Government, to try and make the supply of finance more open to SMEs (who they must assume are unaware and oblivious to the other lenders advertising across our multimedia world), could mean SMEs are building up a whole load of trouble for the future. This is a danger to the whole economy if left unchecked.
We need our SME community to grow and thrive, to flourish and contribute to the economy and provide more employment. What we do not need is for insolvency figures to increase and unemployment to rise.
The UK is no longer in the grips of a credit crunch, the days of a funding crisis are over. We have more sources of finance for SMEs than ever before.
But we also need to take care that entrepreneurs find the right facility for them, taking appropriate advice and ensuring that their business can afford the repayments, both in the short term and, also, the long term.
I would advise all businesses who are looking for more working capital or growth finance to seek expert advice first.
Find an accountant who understands the corporate finance market for SMEs and is well connected to the lenders across the whole market. This means not relying on major high street banks or invoice discounters, but also the peer to peer lenders, the niche debt providers and the wider range of asset-based lenders. It may even be worth considering whether crowdfunding, business angels, or institutional equity investment could be more appropriate for your needs.
You should plan as much as you can. A speedy offer of finance is often the most expensive. Buy yourself time to give yourself more options. It is of utmost importance that you are sure that, whichever offers you receive, they are considered in the cold light of day and with a clear head.
We love our British entrepreneurs to be risk-takers, but that risk needs to be measured. We don’t want to put you under more pressure. Please rethink this scheme; it is not necessary and is a complete waste of taxpayers’ money.
Kirsty McGregor is chairman of The Corporate Finance Network, a network of independent accountants who advise SME clients on corporate finance