A Treasury scheme designed to boost access to finance for small businesses has been called a “total failure” after an official review found it secured loans for only 1 in 20 companies referred to it.
The bank referral scheme obliges nine major banks to refer small companies they turn away for loans to independent platforms which link them up with alternative sources of finance.
A review published alongside the budget last week found that total referral numbers were low and that only 5 per cent of businesses rejected by lenders and referred to the scheme ended up securing finance.
The initiative, launched in November 2016, has arranged 5,387 deals worth about £128 million, with an average deal size of about £24,000. Gross bank lending to SMEs in the second quarter of this year was £4 billion.
The Treasury said it had “anticipated a higher conversion rate” and that the proportion of businesses benefiting “in terms of acquiring finance has been smaller than expected”.
James Robson, chief executive of FundOnion, a loan comparison site, said it had taken the “government ten years to come to the conclusion most people in the SME lending landscape have known for years, that it isn’t working as intended”.
The amount of finance arranged was “shockingly low in the context of an estimated £22 billion funding gap for SMEs. Barely £1 million a month is not even a drop in the ocean”, Robson said.
• A city full of small businesses — what does York make of the budget?
Despite concluding that there was“room for improvement”, the Treasury said the scheme had “generally met its objectives” as it had “helped to better inform businesses of the finance options available to them, and helped facilitate market access to smaller lenders”.
The government said it had “made a positive contribution to competition in business lending, and improved some SMEs’ ability to access finance”.
However, Robson said the scheme had been a “total failure”.
Katrin Herrling, chief executive of Funding Xchange, one of three platforms that receives referrals under the scheme, said 94 per cent of companies referred “do not have a profile that allows them to successfully access funding as they are too young or have blemished credit records, have not managed their payment obligations, or fallen behind in filing annual accounts”.
She said the scheme did not provide feedback to these companies “to help them understand why banks or other lenders are declining their applications”.
Ian Cass, managing director of the Forum of Private Business, an employers’ group, said he was not surprised by the “failure” of the scheme. “For a number of years the banks have not been supporting small and micro-business customers.”
The initiative was announced in 2013 by George Osborne, then chancellor, but was delayed by disagreements over its design.
Companies that agree to the service are contacted with offers from alternative lenders ranging from online lenders to traditional independent finance houses.
The government said several “frictions” could be affecting the scheme’s performance, such as some banks requiring a physical “wet” signature from an SME to onboard them; “incorrect, inaccurate, or incomplete” data being sent to referral platforms; and some lenders failing to refer businesses they have informally turned away for loans.
The Treasury said that it would consult to see if there was “further scope to explore whether the current statutory and operational design of the scheme is properly aligned” with its objectives.
The other platforms which provide the referrals, Funding Options and Alternative Business Funding, were approached for comment.
link