The recent Budget announced a raft of proposals, some new, some that we’ve already heard about, to try to improve access to finance, in particular for SMEs. One of the proposals was to launch a consultation on matching SMEs rejected for finance by major banks with alternative lenders. The consultation has now been launched and looks at whether there should be legislation on this and if so, how it should be dealt with.
The consultation is part of the Government’s aim to improve access to finance for SMEs and to increase competition in the sector. According to Government figures, at present the largest four banks account for over 80% of UK SMEs’ main banking relationships. It follows on from the December consultation on bank sharing of credit data, aimed at improving access to credit data for challenger banks and alternative finance providers (AFPs): http://talkingfinance.gateleyuk.com/?s=sme.
The intention is that there will be an obligation on banks to refer SMEs that they have rejected for loans on to challenger banks and AFPs. The belief is that there are potential borrowers who may not fit the risk profiles of the larger banks, but could find funding elsewhere. Research by the Department of Business, Innovation and Skills (BIS) and BMG* found that 37% of businesses appear to give up their search for finance and cancel their spending plans after their first rejection and that the first approach is usually to their main bank.
It is thought, however, that many of the applicants will not necessarily know where to find such alternative sources of finance, (although many of the larger banks already do try to assist by referrals to brokers). This is not the first initiative to look at this issue. In 2010, Supporting UK Business, the report of the British Bankers’ Association (BBA) Business Finance Taskforce (BFT) Report was published. In the BFT Report, a number of major banks committed to assist businesses by, amongst other things, signposting alternative sources of finance.
Building on this commitment, the Government worked with the BBA and the major banks to pilot a voluntary referral system with Community Development Finance Institutions (CDFIs). The referral system allows the major banks to refer viable businesses to which they are unable to offer finance on to CDFIs. There are also initiatives such as Better Business Finance (BBF), a website set up by major banks in 2011 on the back of the BFT Report. BBF seeks to support business and entrepreneurs in a number of ways, including access to finance.
The subject of the consultation is whether or not to address this ‘market failure’ as the Government refers to the mismatch of applicants and funders, through government intervention and, if so, seeks views on how the Government should deliver this. The Government’s preferred mechanism for implementing the proposal is to require banks to refer details of SMEs that have been rejected for loans to a platform or platforms which can then be accessed by challenger banks and AFPs.
There is no doubt a host of changes ahead addressing SME funding and it seems likely that most will be followed through to one extent or another. At this stage, it remains to be seen how and when many of these will be implemented and the practical implications this will have for banks.
The deadline for responses to the consultation is 25 April 2014.
*SME Journey Towards Raising Finance, BMG Research Report on behalf of the Department for Business, Innovation and Skills (2013)