SMEs to benefit from more diverse finance market

Friday 8 August 2014

Limited companies and sole traders will benefit from a more diverse finance market in the future.

The government has made plans to require big banks to share information about small and medium-sized enterprises (SMEs) that they rejected for finance with other lenders through Credit Reference Agencies.

A consultation on the measures has now concluded and the findings presented to the public.

The proposals are designed to improve the ability of challenger banks and alternative finance providers to compete with the big four and conduct accurate SME credit scoring.

What's more, according to the government, levelling the playing field in the finance market will make it easier for SMEs to find a loan from a lender other than their bank.

Currently, the largest four banks account for over 80 per cent of UK SMEs' main banking relationships.

Credit Reference Agencies will increase competition and innovation in SME lending, thereby improving costs and quality for limited companies and sole traders looking for finance.

Commenting on the conclusions of the consultation, Matthew Fell, Confederation of British Industry director for competitive markets, said: "The UK market for growth finance is innovative and diverse but often small and medium-sized businesses aren’t aware of the options, so there is merit in formalising bank referral arrangements to help match firms with alternative finance providers.

"But it's important that small businesses seeking finance stay in control of their destiny, so these referrals must have their consent and not be automatic."

The current rate of rejection for first time SME borrowers is around 50 per cent. According to the government, this is simply because they don't meet the risk profiles of the largest banks.

While some banks will sometimes refer SMEs on to other providers, such as brokers, most are unaware of the existence of alternative lenders.

Under the new changes, when an SME is rejected for finance by a major bank it will be able to be referred to an alternative lender.

As a small business, when a limited company or sole trader is rejected for finance, they have a choice of several steps. They can speak to another finance provider, use the Appeals Process to have the decision reviewed or approach a commercial broker who can seek finance on behalf of the SME. Businesses may also be referred to a CDFI under the BBA's voluntary agreement.

"Given that previous self-regulatory efforts by the major banks have not led to an effective system of referrals, the government believes there may be a case for using legislation to mandate a flow of information on rejected SME loan applications," the government wrote.

It added that it would prefer for a rejected loan application to be referred from a bank to a 3rd party platform or platforms that would be accessible to other lenders.

If the government legislates to require major banks to share information - with the permission of the SME - the government hopes to create a designated private sector platform.

Lenders and commercial finance brokers will then be able to access information about the SME directly from the platform.

By Victoria McDonnell

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