LESS than three per cent of small businesses referred to alternative lenders via the bank referral scheme have obtained finance, according to the first-ever statistics on the initiative released by the Treasury.
230 small- and medium-sized enterprises (SMEs) have collectively borrowed £3.8m from alternative lenders, out of more than 8,100 firms that have been referred under the scheme to date.
The bank referral scheme, launched in November 2016, mandates nine of the UK’s largest high-street banks to pass on the details of small businesses they have turned down for loans to three finance aggregator platforms – Funding Xchange, Business Finance Compared and Funding Options.
These platforms then share details of the prospective borrowers with alternative finance providers, including peer-to-peer lenders, who can express an interest in the deal if they wish.
But industry insiders have privately expressed concerns to Peer2Peer Finance News that the data confirms the scheme is not working effectively.
It is thought that around half of businesses being referred through the scheme are sole traders or have less than one year of trading history, making them less eligible for debt financing. And many are requesting loans under £10,000, which are unattractively small for many lenders.
One source at a peer-to-peer lending platform said that the businesses referred to them through the scheme tended to have poor credit history, inadequate security or short trading records.
“To make the scheme more successful, there needs to be better education around what types of funding are appropriate for businesses,” said Katrin Herrling, chief executive and co-founder of Funding Xchange. “Some firms applying for debt funding should be raising equity through friends and family, for example.”
It is thought that the Treasury attributes the low volume of deals to several factors, one being that banks are accepting most SME finance applications. Furthermore, referral and finance volumes may be underestimates due to SMEs self-referring to the finance platforms when they are aware of the scheme, rather than always going through the bank. The scheme’s nascence is also thought to be a factor in the low number of deals.
Read more: The SME’s guide to P2P
The Treasury commissioned Professor Russel Griggs to undertake a review of the scheme’s efficacy in April. It is understood that it is now working with the designated banks on Griggs’ recommendations, which include improving communication around the scheme and making sure that the technical arrangements between banks and platforms function as smoothly as possible.
“Small- and medium-sized businesses are the backbone of Britain’s economy and it is right they have access to a wide range of sources of finance,” said City Minister Stephen Barclay.
“A refusal from a big bank should not be the end of the line for a small business and, thanks to our match-making scheme they have another avenue to try for funding.
“Over 200 businesses from beauticians to forklift truck training firms have received the money that they need to grow and we expect this number to increase as the scheme matures.”
Businesses in a range of sectors including construction, retail, technology and science have obtained finance through the scheme, the Treasury said. Loans resulting from the scheme ranged from £200 to £500,000, with an average size of £16,000.
The Treasury also announced that a fourth finance platform, Alternative Business Funding (ABF), will join the scheme from 1 November 2017.
“The ABF team are looking forward to being placed at the heart of the process, to play a very active role in improving access to finance for the SME sector – widely recognised as the driving force of the UK economy,” said Adam Tavener, chairman of ABF.
“We have worked closely with HM Treasury and the British Business Bank since 2015 to help shape this scheme, and we now look forward to continuing to work with them on its delivery.”