According to PlusNet, securing funding is one of the biggest issues facing small businesses in the UK today, with 68 per cent of SMEs listing it as their biggest concern. The Bank Referral scheme was launched in November 2016 with the aim of helping finance these businesses, after they have been rejected for a loan. While the scheme is indeed a step in the right direction, it does not go far enough and is in many ways a flawed process.
Refer before rejecting
One of the biggest flaws with the scheme is that businesses are not referred to an alternative lender until after they are rejected by the banks. This wastes valuable time for businesses and also perpetuates the idea that alternative finance is a ‘backstop’ or last resort for those rejected by traditional sources, rather than encouraging business leaders to consider alternative routes alongside familiar options. Not only that, but it doesn’t necessarily help to raise awareness of alternative finance providers, which remains a barrier for small businesses seeking access to finance.
Another major issue that I see is an inefficient tracking mechanism to measure the scheme’s success. I’d like to see the introduction of a monthly report to the government, to track how many businesses have been successfully referred since the start of the initiative – and importantly, how many are actually fit for purpose. This should also take into account the ease and quality of the experience for the business owner. Online marketplace tools can be very useful but they can also be overwhelming for businesses who have already waited a long time to be told ‘no’ for finance by a bank.
Offer advice, not just funding options
The scheme is currently working in a way to pass deals on to multiple lenders following a rejection by a bank. This is problematic as many regular business owners will in a way be left stranded with no help on who to choose as a suitable investment partner. The scheme must put more time into advising customers which lenders would best suit them.
A wide range of choice with little advice can be incredibly overwhelming for an SME without much experience of the lending process. It is important to spend time and make sure that businesses are actually being referred to a lender who can help.
Another problem with the bank referral scheme is that it often relies on algorithms to refer businesses. Making such decisions using online criteria will always result in healthy, successful and deserving businesses in need of finance slipping through the cracks because of non-standard or ‘grey’ areas.
Take a step back from ‘traditional banking’
For a scheme that is meant to help businesses by offering funding options beyond bank loans, there are certainly many similarities with the traditional banking system. Where a scheme or marketplace is not truly independent, this could impact the suitability of the resulting options. More fundamentally, the Bank Referral Scheme runs the risk of indiscriminately pushing a product, regardless of how suitable it actually is for the customers. There should be close scrutiny here, as this is an area around which traditional banks continue to be heavily criticised.
Given that it is not in the commercial interests of a bank to promote alternative sources, it could be argued that the government could use its position to distribute more marketing materials about the scheme. Centralised information and marketing pamphlets should be given to banks to promote in branches and in targeted digital and print advertising, which could make a real difference for the scheme, both in terms of awareness and uptake.
As part of a wider overarching theme, banks must wake up to the fact that the financial needs of businesses cannot be simply translated into, and serviced by, algorithms. A series of questions and check boxes is no replacement for a nuanced and holistic view of the business. With the current set up, the scheme perpetuates the idea that a traditional bank loan is the first port of call for a business seeking funding. To ensure that businesses get fast, efficient access to finance that fits their needs, we must work harder to ensure that they understand the alternative options that are available to them.
Chirag Shah is CEO of Nucleus Commercial Finance.