Is the effectiveness of bank referral scheme in doubt?
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Less than 3% of SMEs gained finance through bank referral scheme since it launched nine months ago. But is it too soon to call its efficacy?
This month the Government announced that just 230 businesses had received funds via the bank referral scheme since its launch nine months ago. But does this mean that the scheme is a failure?
Back in November 2016 the bank referral scheme was launched with the aim of helping SMEs to get capital. If a small business’s loan application is turned down, the bank refers the business to one of three approved platforms to apply for alternative funding.
In April this year the treasury commissioned Professor Russel Griggs to undertake an impartial report on the bank referral scheme in order to review its efficacy and offer suggestions on how it could be improved. Initial figures from the report show only 2.8% of the 8,100 plus businesses that were referred through the scheme to date have succeeded in gaining funds.
Over the nine-month period examined the report shows that loan sizes to those successfully referred businesses were between £200 to £500,000 with the average loan being £16,000. Official statistics reflect that of the 25% of businesses initially declined by UK banks (from a pool of 220,000 in 2016), only 7% were referred on. It doesn’t exactly shout success.
But on closer examination those figures don’t exactly shout failure either.
So how can that 2.8% of successfully referred businesses be explained in a positive light? Well in part this is explained by the banks.
At least 80% of SMEs who applied for business loans received their funding from the bank they initially applied to. Of the remaining 20% of SMEs whose applications failed, it’s highly likely that many didn’t have a proper business plan in place. That being the case, they’d have been pretty unlikely to secure funding from any of the altfin platforms involved in the scheme.
Is the bank referral scheme working or not?
It’s still early days and it’s clear that the scheme can be improved, as Grigg’s report suggests. After all part of the reason for the treasury commissioning the report was to hopefully come up with suggestions on how to improve the scheme.
One suggestion from the report is to embed the scheme within bank processes to increase uptake. There are also plans to add a fourth referral platform (Alternative Business Funding) to the current list that includes Funding Exchange, Business Finance Compared, and Funding Options.
But in order to improve the chances of small businesses successfully applying for growth capital, more support is needed than the bank referral scheme can provide. Better education for British entrepreneurs on how to build a proper, robust business plan is needed along with sound advice about the many types of alternative funding available in the altfin marketplace.
This also means educating advisors so they can provide their SME clients with the best advice regarding the type of altfin platform that best suits their business stage and growth plans.
It will be interesting to see what other changes are suggested by Russel Giggs’ report, and if those changes can improve the bank referral scheme’s figures over the coming months. The scheme is still very much nascent, and is clearly going to go through a few changes before it can really be deemed a success or failure.
As it stands the referral scheme is unlikely to ever supersede the existing altfin marketplace. Banks may well be improving the service they provide to SMEs with the scheme, but the altfin sector is very much part of making those improvements possible, providing our small and medium businesses a much needed lifeline to alternative growth capital.
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CODE Investing has entered into a strategic collaboration with City of London Group to originate SME loans
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