The government will introduce new legislation forcing high street banks to refer rejected small businesses to alternative finance providers and a new wave of challenger banks.
The idea to increase small business lending competition was floated in the Chancellor’s Budget back in March and was followed by a mandatory referrals consultation which started in April.
Banks will soon be legally obliged to ask small and medium-sized businesses, if they have turned them down for loans, whether they want their information to be shared with online platforms that can match them with alternative lenders.
The announcement also follows the launch of an alternative finance clearinghouse portal, called Alternative Business Funding (ABF), by some of the UK's biggest alternative funders including CrowdCube, Funding Circle, MarketInvoice.com, Platform Black, Seedrs, Zopa and Pensionledfunding.com, among others.
Adam Tavener, chairman of pensionledfunding.com and the catalyst behind the ABF collaboration, said: “From the outset the principle behind our collaboration was to provide a simple and safe journey for businesses to access quality alternative funders if they were not able to, or did not wish to obtain finance from a main bank.
“The confirmation from The Treasury that our initiative will, indeed, pass into legislation is both sensible and pragmatic,” Tavener said.
The Treasury has not yet picked a platform it recommends banks use, however a working group of interested parties will meet soon to discuss options.
Business secretary Vince Cable welcomed the mandatory referrals announcement saying it was something he has been determined to make happen.
“Big banks still dominate and small businesses often give up if they’re turned down for finance by their bank,” he said.
Funding Circle chief executive Samir Desai told The Telegraph that non-bank lending to small businesses had exploded over the last four years and that it was expected to account for £12bn per year over the course of the next decade.
“In June we announced a formal referral partnership with Santander, who will refer small business customers to Funding Circle where we are better placed to help. This acts as a blueprint for how banks and non-bank lenders can work together in the best interests of small business owners,” Desai said.
The Asset Based Finance Association (ABFA) also welcomed the measures that could enable more businesses to find the funding they need.
Jeff Longhurst, chief executive of ABFA, said: “Asset based finance is a key part of the tool-kit available to assist the cashflow of UK and Irish businesses.
“We hope that these new measures will begin to close the knowledge gap that is preventing small businesses from accessing the funding ABFA members can provide.”
The Treasury is now drawing up the new legislation which is expected to be introduced in the Autumn.
The confirmation comes just three weeks after the Competitions and Markets Authority (CMA) recommended a full inquiry into the main banks after it found a lack of effective competition in both small business lending and current account services.
The CMA found that 80% of small business lending flows from the big four banks - Lloyds, RBS, HSBC and Barclays.
Chancellor George Osborne has also outlined the following measures to help drive more growth:
- A detailed look at digital infrastructure to assess whether it meets business needs
- £100m extension of the British Business Bank’s investment programme
- A push from UKTI to promote companies in the financial technology sector overseas
- A review and strategy report examining how technology serves the banking sector, looking at bitcoin and other virtual currencies
About Robert Lovell
Business and finance journalist