By Alex Littner, Managing Director of Boost Capital (
IT has been two years in the making, but the long-awaited bank referral scheme has finally arrived. And it signals an exciting new era for small business funding. The initiative, which will introduce SMEs rejected for bank loans to other lenders that can provide capital, will shake up business finance, promoting the huge range of new funding options now available to smaller firms. Plus, it brings greater transparency of the cost of borrowing, and frees up vital growth capital for Britain’s small business community.
It’s good news for the hundreds of thousands of small firms that fail to get funding every year. But, I would argue the banks will also benefit. The online finance platforms nominated by the Treasury to match the rejected SMEs with other funders – Funding Options, Funding XChange, and Business Finance Compared – will link companies with whichever lender is best placed to help them, whether a large bank, a new entrant to the banking field, or a fintech pioneer. Plus, the scheme broadens the spectrum of business funding. When the banks are no longer the only lending option for small companies, and customers can use a combination of bank and non-bank support, enterprises’ chances of growing and succeeding also increase.
Some of the banking giants are already working alongside new providers to better help their customers – the Royal Bank of Scotland and Santander’s alliances in the peer-to-peer lending field are good examples. The referral initiative should spur on this collaboration, and will accelerate the fragmentation of the financial services landscape. As the recent Competition and Markets Authority report into retail banking recommended, the banks should introduce other funding options when appropriate and preferable for their SME clients. I sincerely hope the referral scheme results in a closer engagement between the banks and their small business customers.
Technology has radically altered the ways funding providers weigh up loan applicants. This scheme frees up SME data to enable this process further. Traditionally, a business owner seeking bank finance would be asked for cashflow information, management accounts, and reams of financial detail, much of it paper-based. Now, we can plug into accounting software, and tap directly into merchant data. Lending to small businesses has been hampered by the inability of those offering borrowing to judge risk. Today, with data being unlocked in these revolutionary ways, such assessments are far easier to make – and quickly. When SMEs need money, they need it fast, and improved speed of service should be another benefit of the mandatory referral process.
However, things won’t change overnight, and the scheme can’t work miracles. There is much work to be done educating small business owners about the funding options available. Also, some bosses feel defeated when they’re rejected for a bank loan - many simply give up, believing they genuinely aren’t fundable. How one addresses these psychological issues is something all of us working with small businesses should consider. There’s the need to provide small firms with guidance about how best to present their case to funders. Many viable and potentially successful businesses miss out on finance simply because they pitch themselves badly, or can’t justify the calculations behind the amounts they request. Again, education is essential here, and our industry must act to deliver it.
Funding Xchange’s Katrin Herrling rightly points out the transparency the referral process will create is a huge advance. Recently, she said: “No longer will business bosses need to make choices about borrowing without really knowing all of the options available to them. Plus, the element of trust in non-bank finance should also improve as a direct result of the new scheme.”
Olly Betts of Business Finance Compared also points out the fact that the Treasury and British Business Bank are behind the referral scheme will go a long way to reassure SMEs that altfi providers are credible, and could even be the best funding choice. Betts commented: “The message to small businesses is not just that a rejected loan application isn’t the end, but also that viable alternatives exist from the outset alongside the banks. In time, more firms will look to non-bank providers first for capital rather than immediately going to their main banking provider.”
This scheme is going to open up real choice in business funding, allowing smaller providers to compete for SMEs’ business alongside more traditional lenders. The potential benefits to those of us working in the altfi sphere are evident. That business owners can easily weigh up their borrowing options and compare the cost and terms of different products is a development that’s been long overdue. The bank referral scheme could be said to be sowing the seeds of a funding revolution, and I don’t think that’s an exaggeration. It will be a boon for altfi, SMEs, and the economy as a whole. And that can only be welcomed.

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