Finance 23 June 2017

The bank referral scheme: Is it fixing a non-existent problem?

The bank referral scheme
The bank referral scheme was introduced to broaden funding access for small business owners

Reflecting on the current finance landscape for small business owners, Anthony Persse, director of strategy at Ultimate Finance, considers whether the bank referral scheme is a solution to a problem that doesn’t exist

The bank referral scheme, launched in November 2016 to help small business owners access finance if bank lenders are unable to offer what they need, was heralded as an innovative idea, which would significantly impact the small business community.

But has it worked for those it was intended to support?

The scheme committed nine of the UK’s largest lenders to passing on details on small firms rejected for finance to three alternative funding platforms – Funding Xchange, Business Finance Compared and Funding Options.

These platforms then share details with other alternative finance providers to facilitate a conversation between the entrepreneur and a potential finance partner

Yet just over six month later the Treasury is announcing a review of the financial ‘match-making’ service, after much lower volumes of referrals than expected have been recorded by lending companies.

The aim of the review is to find out where the blockages are and make sure that the banks are offering the support that smaller businesses need.

The problem is, the review won’t ask the right questions to really get to the bottom of the problem because it will start with the same assumptions that those who ideated the Scheme in the first place began with – that banks are not lending to SMEs.

But is that really the challenge?

We recently undertook research about this issue and spoke to hundreds of small businesses about accessing the cash they need. And, we got a very different answer back. Over half of them were confident of getting a bank loan, if needed.

The real issue was a demand one – they didn’t want to borrow money. They had a misconception that borrowing money showed signs of a weak business, or that they would lose their autonomy if they took funding.

We call this the “fear of funding” and initiatives like the bank referral scheme – though created with good intentions – help to perpetuate the negative connotations of business borrowing, by making it sound like it’s a difficult experience just to apply for money.

What we need to do is come together as a sector and debunk these myths so small business owners can feel confident in making decisions to borrowing money. We know that SMEs need working capital to grow, and the fear of funding when taking finance is necessary, will stifle them.

What we believe is that cash that is fast, flexible and fair should be accessible for businesses and that is just what we offer.

So, while the bank referral scheme is in theory a good thing, the reality is it is not really needed, so it’s hardly a surprise it’s not working that well.

Anthony Persse is director of strategy at Ultimate Finance

Small firms urged to seek alternative finance as business borrowing falls

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