A landmark day for small businesses has arrived as the government’s banking referral scheme comes into operation. Announced as part of its attempt to shake up the SME lending landscape, the scheme comes into affect at a time when smaller businesses are in greater need of growth capital than ever before.
The scheme, in short, mandates that major high street banks must refer SMEs on to a number of alternative finance providers in cases where the bank declines to offer lending. The scheme aims to help the 25% of small business loan applicants who are initially declined by the banks, many of which often cancel their growth plans rather than explore alternative options that may be more suitable.
The British Business Bank estimates that 100,000 businesses have their applications for debt rejected each year, representing a possible funding gap in the UK of £4bn. Indeed, a 2013 BIS survey found that four of the UK’s largest banks account for 80% of SMEs’ main banking relationships, and 71% only go to one provider when seeking finance (usually their existing bank), partly because of the lengthy application process involved.
Three platforms to use
The treasury has announced its preferred platforms to administer the scheme and has chosen Funding Xchange, Funding Options, and Business Finance Compared. According to Katrin Herrling, co-founder and CEO of Funding Xchange: “The launch of the bank referral scheme is a significant step in helping the UK’s small businesses source funding more easily. Even if the bank says ‘no’, Funding Xchange will be there to help tens of thousands of small businesses access the best funding solutions that are right for them.
“When we founded Funding Xchange, we started with the need to create transparency of available funding solutions – including terms and pricing – so that business owners can feel in control of the process and confident to move forward. This is already common in the personal finance market but has been lacking in SME funding.”
Rob Straathof, CEO of finance provider Liberis, welcomed the scheme’s launch. “Small businesses are the backbone of the UK economy, so it’s great to see the government promoting access to alternative finance sources where it’s most needed. Many SMEs can fall at the first hurdle; with long-winded, costly applications, or they are put off from applying by the banks. Boosting access to convenient and transparent alternatives could kick-start growth for thousands of businesses.”
Another P2P set to grow
The launch of the referral scheme comes as another lender announced its expansion plans for the finance landscape. Folk to Folk, a peer to peer lender, opens its third branch today with plans to reach £1bn in business lending by 2020.
Folk2Folk aims to open another seven branches across the UK in 2017, with Harrogate set to open in the coming January. It has so far grown in the West Country region, but says it wants to expand beyond that.
Jane Dumeresque, Folk2Folk CEO, said: “We’re delighted to be opening new branches across the UK as part of our national expansion. At Folk2Folk we think nationally but act locally in helping our local business owners and investors. Our mission is to help local businesses grow by accessing the right finance they need.
“By providing a quick, simple and easy process we can enable UK businesses to get on and achieve their business goals. By establishing a local presence in key regions across the UK, we believe this expansion will help introduce over £1bn in finance for business owners enabling them to prosper and thrive at the same time providing our investors a great return.”