The UK government is predicting increased future demand for the UK’s bank referral scheme after more than 8,000 businesses were referred in the first nine months.
The bank referral scheme was launched in November 2016 and requires nine of the UK’s biggest banks to pass on details of small businesses they have turned down for loans.
Details are passed to three finance platforms – Funding Xchange, Business Finance Compared and Funding Options.
These platforms then share their details with alternative finance providers and go on to facilitate a conversation between the business and any provider who expresses an interest in supplying finance to them.
To date 230 small businesses rejected for finance by the UK’s biggest banks have received £3.8m from alternative lenders.
The value of finance drawn down by UK SMEs so far ranges from £200 to £1,000,000 with an average drawdown of £16,000. The total value of finance approved for SMEs will be higher than the value of finance drawn down.
The loans represent a tiny proportion of the businesses that are declined financing by major banks each year, with an estimated 50,000 turned down last year.
However, while 8,100 businesses have been referred under the scheme, not all businesses are suitable for obtaining finance.
Some have inadequate cash flow, and others may have weak proposals or business plans.
Also, the government pointed out that referral and finance volumes are likely to be underestimates due to SMEs self-referring to the finance platforms when they are aware of the scheme, rather than always going through the bank.
Economic Secretary to the Treasury Stephen Barclay said the scheme was in its early stages and growth was expected.
He said: “Small and medium-sized businesses are the backbone of Britain’s economy and it is right they have access to a wide range of sources of finance.
“A refusal from a big bank should not be the end of the line for a small business and, thanks to our match-making scheme; they have another avenue to try for funding.
“Over 200 businesses from beauticians to forklift truck training firms have received the money that they need to grow and we expect this number to increase as the scheme matures.”
A number of sectors have benefited including construction, retail, technology and science.
A fourth finance platform, Alternative Business Funding, will join the scheme from 1 November 2017.
The government said it will continue to work with banks to embed and improve their referral processes.
Mike Cherry, national chairman of the Federation of Small Businesses, said: “FSB championed the proposals for a mandatory bank referral scheme, to diversify the lending market and boost the provision of alternative finance to those turned down by the main traditional banks.
“We welcome that government has delivered the three platforms and congratulate the scores of firms that have benefitted in the scheme’s early stages. To provide further economic benefit across the UK the scheme must now scale-up, with more referrals and more businesses successfully securing finance as a result.”
Research shows that 71% of businesses seeking finance only ask one lender and, if rejected for finance, many simply give up on investment rather than seek alternative options.
Keith Morgan, CEO, British Business Bank, said: “This can mean businesses missing potential expansion opportunities, with a knock-on effect on UK economic growth. It is therefore heartening to see the positive start made by the bank referral scheme.”
In 2016, 220,000 small and medium-sized businesses sought a loan or overdraft. While 25% of these were initially declined by their bank, only 7% of those declined were referred to other sources of help.
The finance platforms referrals scheme is one of a number of government measures designed to help small businesses access the finance they need to invest and grow.
A challenge to the swift roll-out of schemes can be the high default rate among start-ups, with reports indicating rates of between 30% and nearly 50% in some cases.