The Treasury’s bank referral scheme was launched in 2016 with the aim of helping small businesses secure much-needed finance. However, a recent official review has branded the scheme a “total failure,” with only 5% of referred small businesses actually receiving loans. This is a concerning statistic, and it raises questions about the challenges facing SME lending in the UK.
The bank referral scheme was introduced as a response to the difficulties faced by small businesses in obtaining loans from traditional lenders. Many small businesses struggle to meet the strict criteria set by banks and are often turned away, despite having viable business plans and potential for growth. The scheme was meant to bridge this gap by connecting small businesses with alternative finance providers, such as peer-to-peer lenders and crowdfunding platforms.
However, the latest review of the scheme has revealed that it has fallen far short of its intended goal. Out of the 6,000 small businesses referred to alternative finance providers, only 300 were successful in securing loans. This is a mere 5% success rate, which is a major disappointment for both the government and small business owners.
So, what are the challenges that are hindering SME lending in the UK? One of the main issues is the lack of awareness about alternative finance options among small business owners. Many small businesses are not aware of the various funding options available to them, and therefore, they do not seek them out. This is where the bank referral scheme was supposed to play a crucial role, by connecting small businesses with alternative finance providers. However, it seems that the scheme has not been successful in raising awareness among small businesses.
Another major challenge is the reluctance of banks to refer their rejected loan applicants to alternative finance providers. The review found that only 1 in 10 banks actually made referrals, despite being required to do so by law. This could be due to a number of reasons, including a lack of incentive for banks to participate in the scheme or a lack of understanding about alternative finance options among bank employees.
Moreover, the review also highlighted the complexity of the referral process as a major barrier. Small business owners have to go through a lengthy and complicated process to be referred to alternative finance providers, which can be daunting and time-consuming. This could be a deterrent for many small business owners, who may choose to give up on the process altogether.
The lack of trust in alternative finance options is also a significant factor. Many small business owners still view traditional banks as the only reliable source of funding and may be hesitant to explore alternative options. This is despite the fact that alternative finance providers have become increasingly regulated and offer competitive interest rates and flexible repayment terms.
The challenges facing SME lending in the UK are not insurmountable, and there are steps that can be taken to improve the situation. The government must work closely with banks and alternative finance providers to raise awareness about the bank referral scheme and the various funding options available to small businesses. This could include implementing a more streamlined and user-friendly referral process, as well as providing incentives for banks to participate in the scheme.
It is also crucial for small business owners to educate themselves about alternative finance options and not rely solely on traditional banks for funding. By diversifying their funding sources, small businesses can increase their chances of securing the finance they need to grow and thrive.
In conclusion, the Treasury’s bank referral scheme has been deemed a “total failure” by the recent official review, with only 5% of referred small businesses securing finance. However, this should not discourage small business owners from exploring alternative finance options. The challenges facing SME lending in the UK can be overcome with the right measures in place, and it is important for the government, banks, and small business owners to work together towards this goal. With a more efficient and effective bank referral scheme, we can ensure that small businesses have access to the funding they need to succeed and contribute to the growth of the UK economy.
