There are 9 high street banks that are involved in the scheme.
- First Trust Bank
- Bank of Ireland
- Danske Bank
- First Trust Bank
If any of these banks reject your application for funding, which could include overdraft funds, loans, invoice finance, asset finance (excluding operating leases) and credit cards, they are required to ask whether you wish to have your details passed onto three designated ‘finance platforms’. It is entirely up to you to give consent for details to be passed on, firstly by the bank and then by the finance platform to an alternative lender.
What is a finance platform? And what sort of alternative finance providers are they talking to?
The finance platforms are digital sites that will share your information with their database of alternative lenders, and if any are interested, they will facilitate a conversation between you and the lender. There are three platforms involved in the scheme, which have been picked by the British Business Bank out of a tender process in 2016. They are:
The sorts of alternative finance lenders that they will contact are:
- invoice finance
- hire purchase finance
- equipment leasing
- commercial mortgages
- property development finance
- peer-to-peer lending
- revenue loans
- online short-term lenders
- government-backed start-up loans
- not-for-profit social lenders
Who is eligible for the scheme?
In order to access the scheme, there are certain eligibility criteria that your business must meet:
- You must have a turnover of up to £25m, but not equal to or greater than £25m.
- Your business can’t be part of a group which has an annual turnover which is equal to, or greater than £25m.
- The business must have an address in the United Kingdom and carry out commercial activities as its principal activity.
- If the bank is aware that your business is subject to a formal demand, a statutory demand for payment, enforcement proceedings or other legal proceedings in relation to payment obligations arising under an existing finance facility, it will not consider you suitable for the scheme.
Where has this scheme come from?
The scheme is part of the Business, Enterprise and Employment Act passed by the government in 2015. It requires banks to offer to refer their unsuccessful loan applicants to designated finance platforms in attempt to open up alternative finance options. It is backed by the British Business Bank, which was incorporated in 2013 and is government owned.
According to its website, the British Business Bank is independently managed to ‘bring expertise and government money to the smaller business finance markets.’ It doesn’t lend or invest directly, but works with over 80 partners such as banks, leasing companies, venture capital funds and web-based platforms. Find more information on the British Business Bank.
The scheme has been initiated in the context of research undertaken by BMG in 2014 for the British Business Bank, that found that approximately two thirds of SMEs only go to one provider when seeking finance. It also found that if rejected, 38% of businesses appear to give up looking for finance after this initial rejection. Further research in 2015 found that 324,000 SMEs sought a loan or an overdraft. Of that figure, 26% were initially declined, and of that 26%, only 3% were referred on to an alternative provider.
The scheme is therefore intended to open up critical sources of finance to SMEs who are typically ending their search at first refusal.
What do we think?
In one sense, this is a good way of raising awareness about alternative finance products that are hitting the market. Some are new and not all business owners will be aware of them and how they work. Applying for funding is time-consuming, it can be incredibly disappointing, and it can feel ineffective. However, it is disturbing to think that many businesses who need an injection of funds give up after the first rejection, especially if that rejection comes from the bank. We understand that banks are trusted sources for lending, but there are new products on the market that are suitable for many businesses, and in some cases, offer quicker access to funds than the banks are able to provide. We look at this in much more detail in our articles, ‘Business funding for struggling companies’, ‘Is invoice finance available for my business?’ and ‘Is peer-to-peer lending available for my business?’
These finance platforms are in effect are working as middlemen or price comparison sites. There are pros and cons to this. It is of course in their interest to have businesses make deals with finance providers, but they are also offering access to multiple lenders in one go, which theoretically should make the process much less time consuming for you as a business owner. Usually the information that you have provided to the bank should be enough for the platforms to send on, so you shouldn’t have to start the process from the beginning with each provider.
In some cases, this will mean that the rates that you are offered can be higher than the banks, but not always. Not all finance providers work on the same terms. This also means that just because the bank has rejected an offer doesn’t necessarily mean that an alternative finance provider will; and in some cases, you may receive an offer with more favourable terms. As ever, if an alternative lender does make an offer, the onus is on you to carefully and fully consider your available options.
Ultimately however, this scheme doesn’t actually directly provide any alternative finance that is not already out there on the market, and it doesn’t guarantee your business access to alternative finance. What we know for certain is that it has/is raising the profile of the funding platforms; what we are yet to see is how it works in practice for SMEs.