Lending to small and medium-sized enterprises (SMEs) has never returned to its pre-financial crisis levels. Peter Tuvey, co-founder and managing partner of Fleximize, a UK-based alternative business lender, discusses the bank referral scheme and how alternative finance can benefit SMEs.
Earlier this month, the government’s long-awaited bank referral scheme finally came into force. The scheme legally obliges nine of the UK’s largest banks to refer any small company that they reject for a loan to a trading platform that offers them finance from alternative sources.
The drive towards this landmark development stems from a recognition that SMEs have struggled to get the capital they require since the financial crisis. This has negatively impacted on their ability to meet both their short-term needs and long-term strategic goals.
Over 100,000 SMEs are turned away from big banks annually and those companies that are offered loans are often quoted unacceptably high interest rates, with rigid repayment structures that don’t take a company’s specific needs into account.
While there are far better deals out there for these companies, it is clear the market is not operating properly and this is hurting small businesses. For instance, 90% of SMEs don’t shop around when looking for a loan, and once rejected, they are highly unlikely to look elsewhere.
The growing appeal of alternative finance
Small businesses in the UK are continuing to thrive following Brexit, but many banks are still very cautious when it comes to funding SMEs, as demonstrated by Virgin Money’s recent decision to suspend its small-business lending plans.
As a result, alternative finance has become an even more attractive option for SMEs.
Not only can alternative lenders make funding decisions far quicker, but their size and agility also makes them better placed to react to changing market conditions.
Many small companies also require loans that are tailored to their needs, with the traditional loan structures offered by banks often proving too rigid. The flexible loans offered by many alternative lenders are a fantastic option for SMEs, and provide numerous benefits over traditional loans. They are easier and quicker to apply for online, and often offer far more affordable rates. In addition, a flexible repayment schedule allows businesses to breathe, so that they can focus on growing at their own pace without the intense pressure of having to make fixed monthly repayments.
While the recent growth in the alternative finance industry is very positive, there is no doubt that it is still suffering from a lack of awareness among the UK’s small businesses. While some SMEs have little knowledge of their funding options, others are confused about the different types of loans of offer. Business owners are characteristically busy people and may struggle to find the time to learn about, and consider, all the available options open to them.
This is one of the major issues the bank referral scheme is looking to address. Ultimately, if banks refer SMEs on following their rejected request for a loan, it could greatly improve their understanding of alternative finance. Commenting on the launch of the scheme, chancellor of the exchequer Phillip Hammond said SMEs are the “backbone of the British Economy” and praised the scheme for opening their access to a wider range of finance options.
Whether companies will still choose to take out loans following a referral remains to be seen. However, one thing that is for sure is that the scheme has the potential to revolutionize the way in which SMEs receive finance.