Finance 3 November 2016

New government funding scheme highlights lack of financial awareness among small businesses

loan application
The vast majority of small business owners still only apply to their main bank for finance

Chairman of the National Association of Commercial Finance Brokers (NACFB), Paul Goodman, explains why small companies have, until this week’s bank referral scheme, been woefully ill-equipped to navigate the UK finance landscape.

This week, the Treasury announced a new government funding scheme to help small business owners turned down for loans find alternative means of accessing finance.

The referral scheme will see banks including RBS, Lloyds, Barclays, Santander and HSBC having to pass on details of businesses they’ve rejected to three finance platforms – namely Funding Xchange, Business Finance Compared and Funding Options.

Figures accompanying the launch prove that shining a spotlight on alternative routes to finance couldn’t come at a better time.

Just over a quarter 26 per cent of SMEs are turned down for loans by banks, and yet only three per cent of those that are rejected seek alternative options.

That’s an estimated 100,000 smaller firms being turned down for around £4bn worth of loans annually by the main British banks, according to a recent report by the British Business Bank (BBB).

This equates to a significant tranche of the business community that has simply stalled because initial attempts at accessing finance hit a brick wall.

This launch of the referral government funding scheme also follows hot on the heels of recent retail banking market investigation, which found that 90 per cent of small company owners get their business loans from their main bank – compounding the concern that small business simply isn’t aware of the diversity of finance available, and therefore feels obliged to increase their exposure to risk by sticking with just one lender.

For small businesses, these statistics are worrying – not least because they highlight a fundamental lack of awareness of the funding options that are available beyond those offered by the high street lenders.

First off, it’s important to emphasise that these rejected loans aren’t being fuelled by a lack of available small business finance in the market.

In September, the National Association of Commercial Finance Brokers’ (NACFB) annual survey, which looks at the amount of finance written by its broker members, found that lending levels to small businesses were up 30 per cent on the previous 12 months, which works out as an estimated £20.7bn worth of loans – the seventh consecutive year total lending to small businesses has grown.

Even at the start of August, by which time the implications of Brexit were truly starting to sink in, there was a significant surge in funding enquiries to the NACFB’s findSMEfinance platform. Over the first two weeks, enquiries for finance exceeded £2m per day – twice the level of the same period in the previous year.

That’s a significant vote of confidence for the small business community during a time of political and economic uncertainty.

What this also highlights is that there is a clear disconnect between the alternative finance community’s appetite to lend and SMEs lack of awareness of what kind of funding is available.

The new government funding scheme should help to redress this concern around clarity and transparency – but does it go far enough?

What we’re continuing to see on the ground with our brokers is a need for financial guidance amongst small and micro businesses.

For good reason, there is no off-the-shelf product available in the commercial sector – that’s because the needs of SMEs are diverse. The risk of solely pointing to online platforms – such as those in the Treasury’s new scheme – potentially ignores the nuanced financial needs of different business owners.

With an array of alternative finance options available – from bridging loans to commercial mortgages, equipment and vehicle leasing to invoice discounting – there’s a real need for expertise about what kind of finance and terms are suitable for the needs pf each business.

Access to finance is all well and good, but without guidance, small business owners could potentially find themselves locked into loan deals that are totally unsuitable – which is why broker advice continues to play such an important role between lender and business.

The government is certainly right to open up new routes to funding for small businesses, and anything that increases the exposure of the wide variety of financing options available is ultimately a good thing.

The challenge now is to make sure businesses are given the support – financial and otherwise – to continue growing as we move into a future dotted with political and economic uncertainty.

Paul Goodman is chairman at the National Association of Commercial Finance Brokers (NACFB)

Read on to find out how the new bank referral scheme actually works

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