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Will big banks be forced to help businesses find alternative funding?

The Chancellor has launched a new consultation to look at how the growing number of alternative funding platforms could help small business owners who have been rejected by traditional lenders.

What’s the problem?

According to Treasury data, the four largest UK banks provide banking services to over 80% of the country’s small businesses. As a result, these banks are typically the first port of call when it comes to additional lending applications. In fact, according to research highlighted by the consultation document, 71% of applicants only approach a single prospective lender.

Many applicants are unsuccessful when it comes to applying for business loans. For new businesses, the rejection rate is almost 50% – mainly because many viable business ideas don’t fit into the fairly straight lending criteria applied by the major banks. 37% of applicants simply give up if their first application for a loan is rejected.

For those businesses rejected by the big banks, there are many alternative sources of finance (such as crowdfunding and invoice finance), but the Treasury calls it a ‘market failure’ that SMEs are aware of the existence of non-high street lenders, and vice versa.

What is the solution?

The Government has also found that very few banks refer rejected business applicants to alternative providers of credit.

This new consultation asks whether lenders should be obligated to do so via new legislation. If so, what type of platform(s) should be created to serve the needs of small businesses?

If the outcome of the current consultation is that the banks will have to share the details of rejected loan applicants, then alternative lenders will be able to, if permission has been granted, “quickly and accurately assess credit quality and make a lending decision.”

The Treasury also expects the resulting legislation to “drive competition in the SME lending market”, which can only be a good thing for business owners, who often only approach the major lenders as a last resort, and because they are often aware that alternatives even exist.

Further Information

The consultation will close on 25th April 2015. You can read the accompanying document here.

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