The UK government has backed the need for small and medium enterprises (SMEs) to be linked with other lending organisations if they are rejected for finance by banks, according to a policy document released by HM Treasury today.
The government said it will write a mandatory process into the Small Business Enterprise and Employment Bill due to go through Parliament by the end of the year to help SMEs find alternative lending opportunities.
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The initial consultation, ‘Help to match SMEs rejected for finance with alternative lenders’, launched in March this year, received 45 responses, which agreed that a mandated process would improve smaller businesses’ options and chances of securing finance.
The majority of respondents also took the view that different types of finance beyond loans, specifically including asset finance, should also be included in the scope of any such process, with large banks noting SMEs often simply come to them asking "for finance" rather than a particular product, with which the government agreed.
The government proposes a system of alternative lending ‘platforms’ which will deal with rejected SMEs.
The Treasury said: "SMEs’ information will be forwarded to private sector platforms that will be designated by the government, on the basis of these platforms meeting clear minimum standards that focus on ensuring that SMEs are in control and properly protected throughout the process."
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By GlobalDataObjections and fears to the consultation from businesses included the use and misuse of SME information were a mandatory process implemented; fair access to the proposed platforms; and accountability regarding compliance to terms and conditions set for lenders by government on the proposed platforms.
The government said it intends to set a minimum threshold so that only large lenders will have to pass on rejected SME details, in order to mitigate costs for smaller lenders, despite large banks arguing for a ‘level playing field.’
Additionally the government intends for there to be multiple private sector comparison platforms, "allowing the competition to drive up the standards and quality of the service." However to avoid entrenchment, SMEs will be registered on to all designated private sector platforms.
According to government statistics cited in the paper, the largest four banks account for over 80% of UK SMEs’ main banking relationships. Research by British Business Bank suggests around 40% of SMEs give up on their search for capital if they are unsuccessful with their main bank for finance, meaning potentially up to 32% of SMEs are missing out on finance through a lack of awareness.
The government said: "The result is a market failure of imperfect information, whereby in many cases, challenging banks and other providers of finance are unable to offer finance to smaller businesses because they are not aware of their existence and SMEs are similarly unaware of the existence of these alternative sources of finance."
