The bank referral scheme announced in August 2014 by the British Government still has no delivery date and faces scepticism from leaders in the alternative finance industry, according to Boost Capital.
The scheme, which will see SMEs declined for high street bank loans introduced to alternative lending providers, was welcomed as a positive development in the mission to educate and inform SMEs about alternative funding options. However, many in the alternative finance industry have expressed frustration at the time the bank referral scheme is taking to materialise and the way in which this system will be implemented.
At a roundtable event held by Boost Capital (a provider of business funding solutions to growing SMEs), insiders revealed that banks are pushing for the referral to take place after a business has failed a lengthy and onerous internal application process. First-time SME borrowers face a 50% rejection rate, with fewer than 2% of businesses declined for loans by their banks appealing the decision and only 1.3% successful in their appeal. Referring these businesses only after a long and painstaking review will exclude hundreds of thousands of businesses from the funding they need to grow, in particular firms needing finance quickly such as for equipment repairs and new contracts. To add to this, these firms are likely to incur additional costs from the production of detailed business plans and professional management accounts, unnecessary for many innovative new forms of finance.
Norman Carson, Director of Business Development at Boost Capital, said, “Much of our industry feels frustrated at the time the bank referral scheme is taking to materialise. The key issue is the way in which this system may be administered by banks themselves. If SMEs do not get referred until after a long decision process, I fear it will destroy the referral programme before it gets started. This positive attempt to link capital-hungry enterprises with lenders that want to do business with them will be certain to fail.”
Alternative finance providers are urging banks to refer businesses at the beginning of the application process.
Adam Tavener, Chairman of Clifton Asset Management, explained, “Relationship managers know which applicants are likely to succeed or not, so they could say during an early conversation that, with the business owner’s permission, they could pass on the company’s details to an alternative platform. By setting the tone at the beginning of the transaction you catch as many as 300,000 businesses, rather than the last men standing who’ve had the patience to endure a long and painstaking review.”
At the roundtable, leaders in the alternative lending industry discussed how this system would work and the importance of educating banks about the complex range of funding options available. The discussion raised interesting questions about the role of technology in making these decisions; will algorithms determine which applicants get referred to alternative funders? While the scheme will inevitably be facilitated by technology, human judgement should still play an important part.
Tavener stressed, “It has to be a technology-based solution. But you have to keep the banks’ workload to an absolute minimum to make it easy to deliver from their point of view. We need to embed the technology – preferably one gateway – into the existing bank lending process.”
There was a consensus that any approach must be customer centric, with Tavener adding, “As responsible lenders, we need to think about things from the customer’s perspective, something the banks haven’t done for some time. That might mean asking ourselves difficult questions, such as: does this business owner have other options that might be better for them? There’s going to be a growing push towards this way of thinking on the part of lenders – both from regulators and consumers – and that itself will continually inform how we develop our software, and offering.”
If banks genuinely want to help Britain’s small firms, they need to be more honest about those companies to whom they’re unlikely to lend, and refer them to appropriate alternative finance providers quickly.