Small business funding can be hard to come by, especially as banks tighten up their lending requirements amid an economic slowdown and the threat of a no-deal Brexit. According to recent research by the SME funding platform Code Investing, the average conversion rate of one high street bank for loans to SMEs was just 8% last year. For small businesses, this is a disheartening figure, which speaks to the ongoing difficulty of sourcing funding for growth. But a government initiative launched in November 2016, called the Bank Referral Scheme, seeks to address this issue. And it is already proving to be pretty popular.
Bank Referral Scheme and alternative finance
For more than two years, the Bank Referral Scheme has been bringing alternative finance solutions to SMEs who have been rejected for bank funding.
Nine banks are involved in the bank referral scheme: RBS, HSBC, Barclays, Lloyds, Clydesdale and Yorkshire Bank, Santander, Bank of Ireland, First Trust Bank and Danske Bank. If a small business loan has been turned down by any one of these institutions, for any reason, they are required to share your details with a series of alternative funding providers who can provide quotes if they so wish.
This is particularly useful for new-start businesses which have a shorter track record of trading, or for import/export SMEs which have a high volume of stock and ledger bookings, but little in the way of permanent assets to use as collateral. Unlike banks, which have to comply with extremely strict lending criteria, alternative lenders can take a more holistic approach to these types of businesses, offering short-term financing which has been designed with that business’ particular needs and assets in mind. For instance, an import/export firm may be able to release cash from unpaid invoices by selling or leasing these invoices to an alternative lender. The lender will either buy these invoices at a discount and pursue the payments for themselves; or sell them back to the business at a higher rate, once cashflow has been restored. For the SME owners, this arrangement frees up time and cash, allowing them to get on with the day-to-day running of their business.
According to the most recent Treasury statistics, by August 2018 more than 900 small businesses received over £15m in funding through the Bank Referral Scheme. While this figure pales in comparison to the billions lent out to SMEs by banks every year, it is proof that alternative finance is gradually entering the mainstream. And for SMEs in need of funding, this can only be a good thing.
Bank referral scheme – where to find out more
If you would like to know more about alternative sources of finance for business expansion or acquisition of assets, visit our Alternative Finance page or get in touch with a Tower Leasing representative.