Chairman The Corporate Finance Network
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Why the Bank Referral Scheme is a menace that must be avoided

20th May 2019
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Kirsty McGregor, Chairman of The Corporate Finance Network, warns accountants they must be alert to the dangers of the Bank Referral Scheme.

The government-backed Bank Referral Scheme (BRS) risks luring small business clients into unaffordable debt levels. Accountants must be alert to the cashflow calamities that could stem from the BRS and offer up alternative finance solutions to clients looking to grow their business.

Launched in 2016, the BRS was intended to inject competition into the SME finance sector. It requires the major high street banks to refer any SME businesses which fail to secure funding to an online brokerage, giving the business owner access to other lenders.

According to official government figures, of the 19,000 funding applications made in the first 20 months of the scheme, only 900 businesses accepted an alternative offer. This is good news. After all, lenders in this market tend to provide facilities for higher-risk businesses with eye-watering rates of possibly 2% or even 3% per month. Not many SMEs have the margin to sustain this weighty overhead over a prolonged period of time.

It is time for the British Business Bank to reconsider the BRS.

Most SMEs are referred to the BRS after months of talks with their regular lender over funds. The entire process can leave clients feeling deflated, especially if the bank had initially indicated the loan would go through without fuss. The business has made investments and was counting on the loan to bolster its cashflow.

For some, a high-interest lender could be the lifeline the business desperately needs. With no obligation for a business to take independent advice, the danger is that the business ends up sleepwalking into a debt trap it is hard to escape from.

It is likely that the number of businesses agreeing finance with online lenders is probably higher than the government statistics reveal. In the modern technological world, we have a natural inclination to allow our information to be shared with third parties. Even if SME clients refuse to share their details via the bank, there is nothing to stop them searching the lenders once they are aware they exist.

This is where accountants need to step up their efforts and guide SME owners away from extortionate interest rates before it’s too late.

At a time of high stress, entrepreneurs need objective advice. Are you aware if your client is in financial difficulties? With the increased use of cloud accounting, the expectation is that you have real-time information about the company finances and can be proactive about cashflow forecasting.

Advisers need to be able to spot the warning signs of a business in financial difficulty and provide alternative solutions when needed. Whether they give strategic advice about the direction the business is taking or look at the cost base and working capital cycle to ensure businesses remain profitable and cashflow positive, there is much we can, and should, do.

If businesses do require external finance, there is a myriad of options, from asset-based lending to crowdfunding. And yes, new online lenders can be a sensible option in some cases. In the right circumstances, and with careful planning, sometimes they can provide the best solution. But let’s make sure our clients don’t sleepwalk into a facility which causes them nightmares in the longer term.

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