In August, the government gave a progress report on the success of its Bank Referral Scheme, the assessment stated that over a nine-month period £3.8 million had been lent through the scheme to small businesses that had initially been turned down for funding by the banks.
It conceded that this meant that only 2.8 per cent of the businesses referred through the scheme had been funded – but explained this low completion rate away by suggesting that many those rejected probably didn’t have a business plan in place.
The scheme’s reasoning – no matter how true – highlights a fatal flaw in its conception. When a small business’ loan is rejected initially by a bank, the scheme then refers the business owners to three, soon to be four, partially automated funding platforms.
The assumption was that these platforms would be able to quickly process those rejected applications before deciding whether to proceed with them. This low completion rate suggests that a sausage-machine approach to processing small business finance applications simply cannot work unless that automation is surrounded by a support network.
By assuming that all SMEs apply for funding with a fully-formed business plan, the scheme is ignoring the fact that a lot of aspiring small business owners may well have never been in this position before.
This certainly should not be a barrier to launching a start-up – in fact now more than ever, the government needs to encourage entrepreneurs and would-be company owners to come forward to encourage economic growth.
The Bank Referral Scheme’s premise – to raise awareness of funding avenues outside of high street banks – is laudable but it highlights how automation cannot exist in a vacuum when it comes to small businesses. Companies have already started to spring up to address these concerns; The Hive Network, for example, is a digital ecosystem that allows companies to connect with other businesses in the sector. It encourages companies to refer their peers, helping blossoming start-ups to secure contracts even if they don’t have an extensive track record in the sector.
This combination of technology and traditional ‘word-of-mouth’ referral aims to fix the concept that in the digital age, trust is a hard thing to come by.
In commercial finance, there is a similar concern. Small businesses are still struggling to get access to the right kind of finance, despite corporate credit still being readily available – if the Bank of England’s latest Credit Conditions report is anything to go by.
One of the big issues is that with so many finance options available to SME owners, it’s hard to know which solution to trust to give you access to the right funding.
And with a quarter of small businesses being rejected by banks in 2016, with only seven per cent being referred to other solutions, it is easy to see why trust levels are being eroded in the commercial finance sector.
Expertise and advice can still play such an important role in small businesses securing finance. Sector specialists such as brokers can advise SMEs about the kind of funding that is right for them, can tailor financial terms accordingly and are able to offer suggestions around business plans.
It is not simply about pointing a business towards a finance loan. Unless the loan’s terms are favourable to that business, they are going to struggle to make repayments, which ultimately negates the point of getting funding in the first place.
The Bank Referral Scheme also presumed that there are off the shelf solutions in the commercial finance sector, which simply isn’t the case. Alternatively, brokers are able to offer funding products beyond just straight loans – such as asset finance, factoring and working capital solutions.
Whilst technology continues to create great opportunities for small businesses to flourish, it is short-sighted to think automation can offer a ‘silver bullet’ solution for every aspect of a start-up’s journey.
Paul Goodman is chairman of National Association of Commercial Finance Brokers