The move is designed to widen SME access to finance and encourage them to look beyond traditional lenders.
Currently 71% of businesses seeking finance only ask one lender and if they are rejected, they tend to give up rather than look for alternative solutions.
Research also shows that last year 324,000 SMEs asked for finance, 26% were initially turned down by their bank and just 3% were referred to other sources.
Mike Cherry, national chairman of the Federation of Small Businesses
This change will boost alternative lenders, bringing more competition and choice in the market beyond the big banks
Launching the referral service, chancellor Philip Hammond 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 the finance platforms being launched today, now it won’t be.
“We are determined to maintain the prosperity of our business sector and to support an environment where small businesses can grow and thrive.”
The new rule, which follows implementation of the Small Business Enterprise and Employment Act 2015, requires a bank that refuses finance to write to the SME explaining why its application was turned down. The letter will also offer the business the opportunity to be referred to the platforms. It is up to the business to accept or not.
The banks include RBS, Lloyds, HSBC, Barclays, Santander, Clydesdale and Yorkshire Bank, Bank of Ireland, Danske Bank and First Trust Bank.
Three platforms are currently on HM Treasury’s approved list – Funding Options, Funding Xchange and Business Finance Compared (the finance marketplace operated by Bizfitech) – and it is seeking applications from other finance platforms.
As part of the referral, the banks will forward details about the business, the type and amount of finance requested and the commencement date.
Each alternative finance platform will have between 30 and 50 finance providers which will offer one or more of loans, overdrafts, credit cards, asset finance and invoice finance. Equity finance is excluded.
Keith Morgan, CEO of the British Business Bank which is supporting the new initiative, said that it could transform the UK’s smaller business finance markets.
“It gives businesses additional opportunities to secure funding, alternative providers access to a bigger market of potential clients, and major banks an extra service to offer their business clients when they cannot themselves provide finance,” he said.
The initiative was also welcomed by the business community. ICAEW’s head of enterprise Clive Lewis felt that small businesses would get a second chance to secure finance for their business. This had to be a bonus, he said, because in the past they would have just given up and so missed out on growth opportunities.
“The government wants to ensure a wider range of finance options are available to small businesses, thereby increasing their growth potential,” he said.
“It will be interesting to see the success rate of the new referral scheme as the businesses have already been refused finance by a bank.”
Mike Cherry, national chairman of the Federation of Small Businesses, said that SMEs struggling to access finance would now automatically have a new way to get the support they need to invest and grow. “This change will boost alternative lenders, bringing more competition and choice in the market beyond the big banks.”