An official review has labelled the Treasury’s bank referral scheme as a “total failure” because it has enabled finance for only 5% of referred small businesses. The scheme’s objective was improving access to finance for SMEs through alternative lenders.
Despite facilitating over 5,000 deals totalling £128 million, the scheme’s contribution to the £4 billion SME lending market is minimal. CEOs from significant funding platforms critique the programme, emphasising the need for feedback mechanisms and innovative solutions.
The Treasury’s Bank Referral Scheme
The Treasury launched its bank referral scheme in November 2016. Under this initiative, nine major banks were compelled to refer small businesses denied loans to independent platforms. These platforms aim to connect them with alternative finance sources. Although 5,387 deals have been facilitated, amounting to £128 million, the contributions to the gross £4 billion SME lending sector remain marginal. The average loan size stands at £24,000.
FundOnion’s CEO, James Robson, expressed his disappointment, noting it took several years for the government to recognise the scheme’s limited impact. He termed it “shockingly low” given the £22 billion funding gap facing SMEs. Even with approximately £1 million arranged monthly, he argued it is insufficient when considering the broader financial needs of small businesses.
Despite the modest results, the Treasury defended the programme, citing that it has increased awareness of financing options available to SMEs. However, CEO of Funding Xchange, Katrin Herrling, highlighted flaws such as the lack of a feedback mechanism. This leaves businesses in the dark about why banks refuse their loan applications.
Challenges in SME Lending
Small businesses struggle to secure loans due to various barriers. Lack of trading history and poor credit scores are significant factors that hinder their finance-worthiness. The current scheme fails to address these root causes, resulting in high rejection rates among potential borrowers.
Ian Cass, managing director of the Forum of Private Business, criticised the banks’ disconnection with smaller businesses. This disconnection contributes to the inefficacy of referral policies meant to bridge the gap between traditional banks and SMEs.
The scheme’s design faced initial delays due to disagreements and has been further hampered by the mandatory requirement for physical signatures and issues concerning data quality. These factors contribute to the scheme’s underwhelming efficiency.
Reactions from the Industry
The initiative has drawn mixed reactions from industry leaders. While some see it as a step towards better access to finance, others question its effectiveness.
Katrin Herrling argued that the scheme does not adequately support SMEs with limited finance profiles. The absence of clear communication from banks about loan rejections exacerbates the problem, leaving businesses without the necessary insights for future applications.
James Robson’s view reflects a broader industry sentiment that the scheme’s benefits are overshadowed by its deficiencies. His comments underline the magnitude of the issues faced by SMEs in accessing necessary funds.
Government’s Defence and Continued Efforts
The government maintains that the bank referral scheme has largely met its initial objectives despite critiques.
In defending the scheme, the Treasury emphasises its role in raising awareness about different financing options. However, they acknowledge lingering challenges such as requiring physical interactions and poor referral execution by some lenders.
Efforts to address these challenges are ongoing, with the aim to enhance the programme’s impact on smaller business enterprises across the country.
The Role of Alternative Lenders
Alternative lenders, including online providers and independent finance houses, play a crucial role in offering finance options to SMEs. This bank referral scheme encourages participation from these non-traditional financiers.
While some businesses benefit from these alternative sources, the systemic factors preventing SMEs from accessing traditional loans remain pervasive inadequacies.
Implementation Issues
The scheme’s implementation has not been without controversy. The need for physical signatures and incomplete referrals by some banks highlight key procedural flaws.
Data quality issues further impede the scheme’s success, leaving many SMEs no better off than before its inception. Addressing these core issues is vital for future progress.
Despite good intentions, these administrative difficulties are compounded by the banks’ longstanding disengagement with small businesses.
Future Prospects
Looking forward, resolving these issues remains critical for the Treasury’s scheme to achieve its full potential.
By implementing robust feedback mechanisms and refining processes, the programme hopes to more effectively serve its target audience.
Evolving market conditions suggest a pressing need for renewed strategies to sustain SME growth and financial accessibility.
Conclusion
In conclusion, the Treasury’s bank referral scheme is a start but requires substantial improvements to be truly effective.
To bolster small business growth, continued refinement and adaptation are essential in tackling prevailing issues in SME lending.
The Treasury’s effort to improve SME lending requires more than a simple referral process. Tackling fundamental issues in traditional and alternative lending is essential.
Continual evolution and strategic adjustments are vital in ensuring that small businesses gain the necessary support and financing that drives economic growth.
