Referrals for bank-jilted small firms still conspicuously absent

A year after the Government announced a scheme, there has been no progress

Small firms are still waiting for the promised bank referral scheme,announced by the Government a year ago, which would force UK banks to suggest alternate financing options to those refused credit.

There is still no delivery date for the initiative, which aimed to increase competition between the finance providers and help stimulate the small business sector.

Recent Bank of England figures showed the largest drop in small business lending since records began in June this year; lending to these companies fell by £5.5bn compared to the previous month.

Alternative funding providers are calling on the Government's British Business Bank, which will spearhead the bank referrals scheme, to accelerate the roll-out to prevent a contraction in the small-to-medium-sized enterprise (SME) sector.

"Much of our industry feels frustrated at the time the bank referral scheme is taking to materialise," said Norman Carson, director of small business loans business Boost Capital. "The drop in lending demonstrates how critical it is that small businesses get the funding they need."

The SME sector is seen as being vital to continued UK economic growth as it employs some 25.2m people - almost half the country’s population - across 5.2m businesses.

Under the new referral rules, banks who reject SMEs for finance will be required to ask these firms whether they want their details to be shared with websites, who will then refer companies to challenger banks and alternative lenders.

The scheme was welcomed by the small business community when it was mooted in August 2014. It is estimated that small firms could benefit from an extra £2bn in lending once the scheme is up and running.

At a recent roundtable for the alternative finance industries, several players voiced their concerns over the lack of progress made by the British Business Bank.

First-time SME borrowers face a 50pc rejection rate and fewer than 2pc of the businesses declined for loans by their banks appeal the decision. The success rate for appeals stands at just 1.3pc.

Currently, seven out of 10 SMEs that are refused a loan do not go on to raise alternative finance, according to the Department for Business, Innovation, and Skills (BIS).

"The key issue is the way in which this system may be administered by the banks," said Mr Carson. "If SMEs do not get referred until after a long decision process, I fear it will destroy the referral programme before it gets started."

It has emerged that high street banks may demand that referrals only take place after an appeal has been made by the customer.

Small business owners who are refused a loan by their bank can appeal but according to a Government policy paper on the process, just 9,000 small business appeals were made between 2010 and 2015.

"The process should be automated, and we can expect batches of information from the banks overnight, so there’ll be a defined set of data," he said. "We’ve said to the Government, keep implementation as simple as possible for the banks, as firms such as ours – unencumbered by legacy systems – can deal with the complexity at our end to get the referral scheme moving forward quickly.”

The HM Treasury could not provide any accurate guidance on when the bank referrals scheme would be launched.

"A key part of our long-term plan is to ensure that small businesses are able to access the finance they need to grow and succeed," a spokesman said. "The best way to deliver this is to increase competition in the sector and remove barriers to new sources of finance for small businesses.

“That is why we have introduced legislation which will require banks that turn down small businesses for loans to pass their details to platforms that will then match them with alternative lenders. This will help ensure businesses that want to borrow, and lenders that are ready to lend, can easily find one another.”

First-time SME borrowers face a 50pc rejection rate and fewer than 2pc of the businesses declined for loans by their banks appeal the decision. The success rate for appeals stands at just 1.3pc.

“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," said Adam Tavener, chairman of pension-led funder Clifton Asset Management.

"The banks are pushing for the referral to happen after a business has failed a lengthy and onerous internal application process. 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.”

According to Conrad Ford, chief executive of small business finance matchmaking service platform Funding Options, the process should be automated so that prospective candidates face the fewest barriers to securing finance.