Why are banks redirecting small business loan applications?
Anyone who remembers the heady days of Who Wants to Be a Millionaire will recognise our title phrase! Many a contestant when stuck on a question - usually involving a huge amount of money - would take the last resort option of phoning a friend. This could have devastating consequences if the friend either didn’t know or got it wrong. But many times it saved the day.
Now, it seems, the big banks are going to be phoning a friend on behalf of small businesses. Changes under The Small Business, Enterprise & Employment Act 2015 are scheduled to come into effect in November. As part of this, nine leading high street banks will redirect all small business loans they reject to independent finance organisations.
The aim of the initiative is to boost competition amongst those lenders offering small business loans.
The way the scheme will work is that if a bank rejects an application for a small business loan it is then obliged to refer on the applicant (if they agree) to other organisations that may be able to help.
Applicants will then be contacted with offers from a range of alternative lenders including online platforms and independent finance houses under the umbrella of three independent finance portals: Funding Options, Funding Xchange and Bizfitech.
We are delighted to say that Fair Business Loans is already fully involved in the early stages of the process: once again being at the forefront of the financial revolution!
Whilst the new scheme will be implemented in the next three months, plans were actually announced two years ago by George Osborne when he was chancellor, but implementation of the scheme has been delayed by disagreements over the stage at which banks are legally obliged to refer to another finance provider.
It now appears that this stage will be the point at which a company is turned down for a small business loan, regardless of how advanced their existing loan application is.
So what difference will the new initiative make? According to Conrad Ford, founder and chief executive of Funding Options “the referral scheme has big potential. The major banks would admit they turn down two hundred thousand SME finance applicants each year.” He added that surveys by the BBA - the UK’s largest banking trade association - suggest that “40 per cent of these firms would accept a referral to government designated finance platforms.”
This will be a refreshing and welcome change for those applying for small business loans, for whom it can often seem that the financial system is stacked against them.
Rob Benfield, Head of Fair Business Loans says “Banks do a great job at providing financial services to the mainstream mass market. Where they struggle is when a person or business does not fit into that mainstream because of some specific element of their overall profile or credit history, or they are just too complex. Fair Finance is a social business with a vision to revolutionise financial services to give everyone a chance.
We have already been working with banks for many years to provide access to financial services to help the people and businesses that fall outside of their services. The changes in law that require the nine largest banks in the UK to refer declines businesses to other lenders such as Fair Business Loans is welcomed as it should allow more businesses to be directed to our services. Importantly, the outcome of this will be that Fair Business Loans and other specialist lenders will be able to assist more small businesses with the funding they require to grow, leading to more jobs and wealth creation in our local communities.
Although the scheme is positive it needs to come with a health warning; there do still remain many unresolved issues in the small business lending market, including a lack of regulation and a lack of transparency regarding pricing, meaning that some businesses will get referred and linked to lenders through this scheme that will not be good options for them. It is therefore important that businesses looking for funding continue to maintain a ‘buyer beware’ approach to alternative funding, and do their own research of lenders and carefully read the loan contracts they are entering into. Many of the small business lenders on the platforms have sprung up in the last few years with little track record and little independent verification. Fair Finance has been established as a leader in its field for over a decade, and as a social business can be trusted to have the interests of the businesses it supports and funds at its heart”
The service will be free for small companies. Portals will make money by charging a referral fee to lenders that win business through the new system.
Could this be the dawn of new era for small businesses, in which the financial system provides them with genuine opportunities to achieve their potential rather than seemingly placing barriers in their way?
At Fair Business Loans our passion has always been to offer a range of financial products and services designed to meet the needs of people who are excluded or ignored by the mainstream financial services industry. We’re glad that the rest of the world is gradually beginning to catch up!