Credit and Finance
New regulation to give hope to SMEs rejected by banks for finance
Posted on by Cindy Yip
Estimated read time: 3 mins
In March’s Budget 2016, it was announced which three organisations would be the designated finance platforms under the Small and Medium Sized Business (Finance Platforms) Regulations 2015. The objective of the regulation was that, if a small business is rejected for finance by big banks, they’d be obliged to offer the business a referral to a designated, online finance platform. These platforms will give alternative finance providers the opportunity to offer viable businesses the finance they need.
Once the policy is enabled, designated banks will need to offer any SME they decline for finance the opportunity for their details to be referred to a designated platform. These platforms will help match the SME with alternative finance provider that could provide them with the finance they need to grow and expand.
The government believes that the positive action in this area is an important step to improving access to finance and would encourage a more competitive banking sector. At present, the largest four banks account for over 80 per cent of UK SME’s main banking relationships as many SMEs only approach the largest banks when seeking finance. In the case of first time SME borrowers, the rejection rate is around 50 per cent – the new regulation means that SMEs now have more choice and can be steered towards the right direction if needs be. There are often challenger banks and alternative finance providers with different business models that may be willing to lend to these SMEs.
Although the largest banks will sometimes refer these SMEs on, in many cases challenger banks and other providers of finance are unable to offer finance as they’re not aware of their existence and the SMEs are not aware of the existence of these alternative sources of finance. This is a market failure, of imperfect information, resulting in SMEs that are viable loan propositions not receiving the finance they need.
Attempts have been made before to address this market failure, but they’ve been limited in scope and slow in achieving results. The government is committed to helping small businesses access finance as they are the backbone of the UK economy.
This is the first step that codifies in law the opening up of finance opportunities for small businesses in the UK. This is a big step forward in the progression of a major reform to the smaller business lending market and will hopefully help SMEs to access the finance they need to grow and expand.