Now that banks must refer business customers declined for loans to alternative providers, more SMEs will learn about the innovative ways of lending and repaying money in the world of fintech. SMEs will also benefit from opportunities to receive loans from other sources.
Banks rejecting SME loan applications has been a common gripe among the business community in recent years. But now, small firms that don’t fit the banking giants’ lending criteria will be given a second chance through the new bank referral scheme. It may not just be those struggling with the banks that benefit. Britain’s entire small business community will learn about the range of innovative lending options now available, plus how easy it's become to compare options and apply for what’s on offer.
The referral process is set to go live in November 2016. It requires banks that reject business customers’ loan applications to introduce them to alternative sources of funding. Companies will be referred to potential other lenders via online finance matchmaking platforms. Funding Options, Funding XChange, and Business Finance Compared are the initial three platforms designated by the British Business Bank to match firms with providers. Importantly, SMEs are given a number of options, so they can compare costs and terms of lending and therefore make an informed choice.
To illustrate the situation, here are some of the figures:
Almost 100,000 SMEs are declined for bank finance every year, according to the British Business Bank.
Roughly half of all first-time SME borrowers applying for loans are rejected by the banks.
Only two per cent of firms rejected for bank finance appeal the decision at present.
Matchmaking platforms should level the playing field for businesses, and could be the biggest news in business finance for some years. Smaller firms can now shop around for funding just as consumers already do - price comparison websites have improved transparency around pricing of products and have also increased competition in the retail market for years.
Olly Betts, chief executive of Business Finance Compared says: “For consumers, it’s been made easy to find finance that’s right. We want to introduce that for business customers too. In the consumer market, between 50 and 70 per cent of loans and credit cards are sourced through comparison sites. But over 70 per cent of SMEs contact just one provider. We want to use technology to close that gap.”
Betts believes that simplifying the application process and providing rapid lending decisions will attract SMEs and change their borrowing behaviour. “Of course, cost of borrowing is important to SMEs,” Betts adds.
“But often what they’re most concerned about is the likelihood of their application being approved. The reason so many businesses give up when they’re rejected by the banks is the weeks it takes to gather the information required, plus waiting to see if they’ve been accepted or declined. Our focus is on providing an uncomplicated, fast way of understanding the options available, but also how likely it is a business will be approved. That’s what time-poor business owners want to know.”
Colin Goldstein, head of strategic partnerships for fintech lender iwoca, points out that the legislation enforcing the referral scheme has had a positive side effect - accelerating banks’ existing efforts to work more closely with new business lenders.
He explains: “The mandatory referral scheme is a positive development, which will give SMEs greater confidence in alternative lenders. But the banks already recognised the damage potentially caused to their relationships with their business customers when they turn them down for loans, and several have been acting to address that.
“To complement the referral process, they’ve been sign-posting customers that don’t meet bank lending criteria towards other, better-suited providers. RBS’s Capital Connections pilot initiative, which iwoca joined after a rigorous selection process, has been directing the bank’s small business customers to alternative sources of funding for some months with great success.”
Opportunity for innovation
Funding pioneer iwoca is a good example of how new lenders are revolutionising small business finance – it offers SMEs a flexible, fast, online credit facility up to £100,000, almost like a business overdraft. The lender links into a company’s trading data or accounting software to simplify and speed up the borrowing process, making lending decisions in hours, with funds available immediately. Such genuine innovation is proving increasingly attractive to small businesses, as are the great advances being made in how borrowing is repaid.
GoCardless works with a large number of the new generation of altfi (alternative finance) providers, enabling their SME customers to make loan repayments quickly, easily, and regularly using Direct Debit, a facility that banks often keep off-limits to many smaller businesses. Short-term, online lender Boost Capital is just one funding pioneer using the new payment collection method from GoCardless, and it has found that its small business customers love the ease with which they can now repay borrowed funds.
Alex Littner, Boost Capital’s managing director, hopes the referral scheme will alert more businesses to the possibilities offered by new funders, as well as educating them about how technology is changing the borrowing experience from application right through to repayment.
Littner says: “The platforms facilitating the referral process have the potential to really change the way all SMEs look for funding, not just those being referred. When companies realise they can make one simple application and get clear, uncomplicated information about what different providers offer, it puts the power into their hands. The platforms also reduce the margin of error in loan applications, as they filter out lenders that may not be appropriate, so an entrepreneur can be confident they’re approaching a suitable funder.
“Once businesses realise these options are there, and that technology is being applied to make every stage of the borrowing process easier, right through to how they clear their debt, more SMEs will consider altfi to be the preferable way to finance their businesses," Littner concludes.
Altfi going mainstream
When Lord Adair Turner, former chairman of the financial regulator and previously a critic of alternative lenders, recently admitted that lending platforms can underwrite borrowing as well as established banks, many took it as a sign that altfi had truly entered the mainstream. The arrival of the Government-backed referral scheme is also a ringing endorsement of fintech as a dependable source of business capital.
Finance matching platforms are another important piece of the puzzle, and will help huge numbers of SMEs to safely navigate their way through the range of new funding options available to them. Researching, securing, and paying back SME funding has now become a lot easier – a welcome fact that more small business owners should now discover.
With GoCardless, lending platforms can use Direct Debit to take repayments from their customers, allowing easy automated payments on a schedule tailored to meet their precise requirements.