The days when a ‘no’ from the bank manager will signal the end of spending plans for businesses are drawing to a close.
Provisions within the Small Business Act mean it will no longer be acceptable for banks to respond to loan applications with a refusal alone.
Under the new rules, banks that reject applications for loans from SMEs will be obliged to ask whether applicants would like their details shared with intermediary websites who, in turn, will refer those companies on to challenger banks and alternative finance providers.
And the process that will connect businesses with those sources of finance away from the mainstream banks is taking shape.
The state-owned British Business Bank (BBB) has invited finance companies to become part of a new referrals programme to help smaller businesses access much-needed funds.
Keith Morgan, BBB’s chief executive, has said that the referral process will open up more choice for smaller businesses and benefit the challenger banks and alternative finance providers by connecting them with a greater number of potential customers.
According to BBB research, two thirds of applicants only approach one provider when they seek finance, and 38 per cent appear to give up on the search for funds after the first attempt.
The UK government has labelled the current situation – whereby credit committees appear to dawdle over loan applications only to turn them down – as inadequate and anti-competitive.
A Competition and Market Authority study from last year that found that 80 per cent of the bank lending that does flow from banks to SMEs emanates from the biggest four high street banks – Lloyds, RBS, HSBC and Barclays.
Ten banks, including the big four, will have new obligations under the Small Business Act to refer business’s funding requirements to the new online platforms.
The onus is very much on the banks to pass on information and the mechanics have yet to be tested, but it is likely the legislation will oblige banks to ask businesses for their consent before details are passed on and ensure that the business and any individuals involved cannot be identified at the referral stage.
The fine print of how the scheme will operate has not been drawn up; policymakers will await the outcome of a consultation period that closes at the end of August. But the scope to increase the flow of finance and overcome obstacles such as lack of familiarity with the mechanics of alternative finance provision is already clear.