Small Business Advice

The Bank Referral Scheme Is Set To Revolutionise Small Business Lending

29 Nov 2016

Cash flow is one of the most common challenges that business face. In a survey by the Department for Business Innovation & Skills, four out of ten SMEs (42%) cited cash flow as being an obstacle, with 7% classifying its management as the main thing holding back their growth.

However, the recent introduction of the Bank Referral Scheme, which forces leading banks to signpost rejected applicants to third parties, is likely to result in it becoming increasingly easier for companies to access funds and grow their businesses.

In November the scheme was launched, and it became law for nine of the leading banks to now offer to refer rejected businesses to three Government designated platforms.

It Is Not Easy For SMEs To Engage With Banks

Historically, access to loan financing has been difficult due to the big banks operating what was in effect a monopoly. Whilst major banks operate a crucial function in the economy, their lending criteria is very strict and many credit worthy businesses are frequently turned down due to them not fulfilling the binary lending criteria of these lenders. Additionally, whilst the banks were assisted with quantitative easing during the credit crisis they often used these funds to strengthen their balance sheets, as opposed to allocating them to small businesses.

The Rise Of Alternative Finance

In the wake of banks reducing lending to SMEs, alternative finance has become increasingly popular. Alternative finance providers consist of online platforms and marketplaces which allow businesses to access crucial funds quickly. In 2015 the market (including all types of alternative finance products) grew to £3.2 billion, representing year on year growth of 83.91%

The Government first took an interest in the sector in the sector in 2012, with the British Business Bank investing £20 million into leading P2P platform Funding Circle, to facilitate lending to SME businesses. Since then the Business Bank has also deployed further funds into Funding Circle, as well as a number of other lenders such as Market Invoice and Thin Cats.

Bank Referal

Introduction Of The Bank Referral Scheme

In the 2014 Budget the Government announced their intention to match businesses rejected by banks with alternative finance providers. Shortly afterwards this passed into law, as part of The Small and Medium Sized Business Regulation.

The legislation, known as The Bank Referral Scheme, came into being on 1 November 2016.

Presently nine UK banks (Allied Irish, Bank Of Ireland, Barclays, Clydesdale, Dankse Bank, Yorkshire Bank, HSBC, Lloyds and RBS) have to now offer to refer rejected SME’s to the three designated finance platforms.

To celebrate the launch of the service Chancellor Philip Hammond said:

“A refusal from a big bank should not be the end of the line for a small business and, thanks to the finance platforms being launched today, now it won’t be.”

Who Is The Scheme Open To?

The scheme is available to UK SMEs with up to £25 million in turnover, who are seeking an overdraft, credit card, invoice finance, hire purchase or a bank loan of at least £1,000.

Who Is Involved In The Scheme?

During the launch phase HM Treasury have designated three platform providers – Funding Options, Funding Xchange and BizFiTech. These three websites are in essence comparison services for businesses seeking debt finance. They do not provide loans directly but will share applicants’ information with a number of different alternative finance providers.

The alternative finance providers include newer P2P entrants such as Funding Circle and Ratesetter, as well as more established companies such as Bibby Financial Services - who provide invoice finance and factoring services.

The range of products on offer from the alternative lenders include term loans, invoice finance, hire purchase, equipment leasing, commercial mortgages, property development finance, peer to peer lending, revenue loans and online short-term lenders.

Further platforms are likely to be designated from 2017.

How Will It Work In Practice?

Rejected business applicants who apply for loans or extra financing facilities with one of the nine high street banks will be offered a referral to the Government designated platforms. It will be at the discretion of the business whether they want to be referred. There is no obligation and a business can choose which of the platforms they then wish to engage with.

Businesses will provide the finance platforms with information which will help them match make applicants with the most relevant lenders. If any of these solutions are of interest to the business, the platforms will then help them through the application process.

What Are The Benefits Of The Scheme For Businesses?

The benefits of the scheme are financial and non-financial.

Fast Access To Finance - In simple terms companies will find it easier to access the finance they need to manage their cash flow and grow their businesses. It is currently estimated that over 100,000 businesses a year are rejected for finance - and is reasonable to assume that these businesses do not know where to go once they have initially been turned down.

Efficient - Applying for finance through one of the three designated platforms is efficient. Businesses will only have to make one quick application to see whether they are likely to fit the lending criteria of scores of different providers. Funds can also be provided to SME’s often at a speed far quicker than the traditional banks would facilitate.

Maintain Your Credit Score - Being turned down for finance can adversely affect a business’s credit score. Letting the designated platforms decide which lenders are most likely to grant you access to finance will reduce the chance of additional rejections which can further negatively impact on this.

In Conclusion

The Bank Referral Scheme is likely to benefit SMEs, as well as the economy at large - a recent report by Cambridge University’s Centre For Alternative Finance and GLI found that £20 billion is lost to the economy through a lack of alternative business funding awareness.

Its introduction also acts a timely, and much needed, shot in the arm for small businesses in a post Brexit environment. Hopefully the Government will continue to adopt a number of innovative policies to foster and grow this community.

Keir Wright-Whyte

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Managing Director

0207 043 4000

About the author

Originally graduating with a degree in geography from Edinburgh University, Keir claims that he was then tricked into becoming an accountant by one of the UK's top 5 accountancy practices.The deception extended to the usual training in audit and associated activities.

Keir subsequently worked in a number of advisory roles with clients including in the energy trading, pharmaceuticals and financial services sectors.

He loves working at Accounts & Legal because of the variety of work and clients, the excellent team ethos and morale, the importance placed on genuinely helping and being useful for clients and because he believes what he does matters to clients and helps the firm.

Keir's primary role is to ensure that new clients with complex businesses or needs are on-boarded in the best way and he is a "trouble shooter" both for clients and where complex issues arise internally. He also helps the accounting teams strive to improve what we do for clients, whether processes or services.

When not debiting or crediting, Keir has a penchant for fixing old buildings, skiing, surfing and cycling.

  

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