The UK’s nine largest banks are now legally required to help business owners find funding elsewhere if they turn down their application for a loan.

The bank referral scheme, which came into effect on 1 November 2016, was introduced as part of the Small Business Enterprise and Employment Act. Its aim is to provide entrepreneurs with information about alternative, non-bank sources of finance to help them find the funding they need.

One of the biggest barriers to funding business owners’ experience is the lack of information about the other finance options that exist. The scheme hopes to increase confidence in, and ease of access to, alternative finance options.

The difficulty securing small business funding

In the last year, around one in six (16 percent) of the UK’s small and medium sized businesses claim to have been turned down for finance by a mainstream lender like a bank. This is up from the 11 percent of small firms that were refused funding in 2015.

The British Business Bank estimates that around 100,000 small businesses are refused funding (PDF) by high street banks each year, creating a funding gap of £4billion. As a result of their inability to access the funding they need, 31 percent of the respondents said they had missed out on business deals or investment opportunities and had been forced to cancel their spending plans.

Why are the banks so reluctant to lend?

There are a number of reasons why the banks are reluctant to lend to small businesses. Since the financial crisis of 2008, many banks have raised their lending standards to avoid taking on high levels of risk. Small business loans generally carry more risk than loans to large businesses or private consumers because of their limited trading history.

There are also a number of other factors that contribute to the risk factor associated with small businesses. This can include a relatively weak cash-flow position, the lack of any significant credit history and the absence of security.

Alternative finance providers can fill the funding black hole

The introduction of the bank referral scheme means that banks that refuse a loan application from a small business must now give firms the opportunity to have their applications passed on to a number of alternative providers.

At the moment there are three online platforms that have been pre-approved to receive these referrals and help match small businesses with suitable finance options. This includes: Funding Options, Business Finance Compared and Funding Xchange.

This improved choice can only be a good thing for small businesses. In 2013, a Department of Business, Innovation & Skills survey found that 71 percent of small businesses only go to one provider when seeking finance (PDF), and this is usually their existing bank. Anything that increases the options available to small businesses should be welcomed.

The KPMG Small Business Accounting & Funding Xchange alliance

Funding Xchange and KPMG Small Business Accounting have formed an alliance. The Funding Xchange lending portal allows small businesses to research and compare lending offers from a number of specialist financial service companies. We believe the result is improved transparency of the funding options available to business owners and access to the affordable finance they need to grow.

Need help finding the right funding option?


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