The government consultation into the mandatory referral of small businesses from banks to alternative providers, announced in the Chancellor’s Budget in March, closed last Friday and Funding Circle provided its recommendations to the consultation.
Mandatory referrals have received a great deal of interest from the small business finance community (both alternative and traditional) and could provide us all with a big opportunity to help more small businesses whilst increasing lending opportunities for investors.
Crucially though, we believe that a referral needs to take place much earlier than it currently does. Industry data shows that 50% of businesses exploring finance with their bank do not reach the formal application stage, 61% don’t get to the formal rejection stage, and only 12% actually receive a rejection letter from the bank. Signposting to alternatives therefore needs to start much sooner than the formal rejection stage.
Funding Circle is proposing that the government mandates banks to signpost alternative finance providers much earlier in the process, either during initial face to face meetings with a business owner, or in early marketing materials. There are many situations where a bank is willing to lend but on terms that are not acceptable to the business and it is important alternative providers at signposted at this stage.
This signposting could either be directly to alternative providers, such as Funding Circle, or to an independent platform that provides applicable information and contact details for vetted alternative finance providers. We currently suggest businesses who don’t meet our lending criteria look at their options via the alternativebusinessfunding.co.uk portal.
We believe that working closer together, with both banks and other alternative providers, to ensure the business community receives the right signposting at the right time, will ensure businesses access the finance they need to grow, creating more lending opportunities for investors.
We are supportive of the consultation and looking forward to seeing the government’s recommendations.