Britain’s high-street banks, when refusing loans to small and medium-sized firms, will be forced to help them find alternative sources of finance, according to George Osborne.
In a speech to the Innovate Finance conference in London, the Chancellor said the government would encourage the growth of “alternative finance providers”, a major part of the financial and technology (or FinTech) sector to which Osborne pledged £100m of additional investment.
Under the new rules, banks that turn down SMEs for finance will have to refer them to other sources of funding, such as challenger banks, direct lenders, asset finance providers and crowdfunding sites.
A joint report by the Treasury and the Department for Business, Innovation and Skills (BIS) said: “The government has decided to legislate for a mandatory process in the Small Business, Enterprise and Employment Bill, where SMEs will be forwarded on to platforms that will help them be linked up with alternative lending opportunities”.
The government’s new attitude to business lending is, in part, down to an investigation into business lending by the Competitions and Markets Authority (CMA). The CMA found that four banks – Lloyds Banking Group, RSB, HSBC and Barclays – currently account for around 80% of loans given to small businesses.
Another move to break the grip of the big banks came in May, when Bank of England data revealed lending to SMEs by high-street banks fell by £723m in the first quarter of this year.
Commenting on the news, Tracy Ewen, managing director at IGF Invoice Finance, said: “Very often the smaller alternative lenders are better placed to judge a business based on its own individual merits and provide a tailored funding structure. Many alternative lenders have been doing this successfully for years, but still find themselves under the radar when businesses seek funding to help them grow.”
Jeff Longhurst, CEO of the Asset based Finance Association (ABFA), said: “Asset based finance is a key part of the tool-kit available to assist the cashflow of UK and businesses. It’s great to see the government acknowledge the industry is already making an enormous contribution to funding the economic recovery, and can make an even greater contribution in the future.”
Louise Beaumont of supply chain and invoice finance provider Platform Black and also founding member of the Alternative Business Funding collaboration (ABF) said: “We know that the High Street banks currently turn away around 40 per cent of loan applications from SMEs and evidence suggests that around one fifth of those do not approach providers of alternative finance because they are simply unaware of what is available.
“Legislation to direct the banks to pass these customers on to alternative sources is a major step forward. The alternative finance providers stand ready to help these businesses and get the UK economy firing on all cylinders.”
For more information on this subject, read the profile of Platform Black’s Louise Beaumont in the August issue of Credit Today.