'A drop in the ocean’ - Bank Referral Scheme - Revisited


My January article referred to the launch of the British Business Bank’s ‘Bank Referral Scheme’. Launched in November 2016 as part of a Government initiative obliging participating banks which reject financial support for businesses, to offer those businesses a referral to three aggregator platforms, these platforms share the details of the businesses seeking loans with a selection of alternative finance providers.

I pondered at that time if the Government had done enough, specifically in choosing to work with a relatively small selection of direct lenders, while excluding, as an example, the National Association of Commercial Finance Brokers (NACFB) which has over 1,600 members across the UK.

Figures released for the first nine months of the scheme evidence that 230 SMEs have collectively borrowed £3.8m through the platform, however this represents a mere 2.8% of more than 8,100 firms that have been referred under the scheme to date.

Professional opinions are divided, but I consider this an underwhelming amount of funding support with a poor conversion rate. Why?

One theory is that in fact 80% of SMEs applying for bank funding are successful, so the remaining 20% will redirect to the ‘designated online platform’ and to alternative lenders or sources of help such as commercial brokers.

Some of these 20% will have no viable business model or indeed business plan in place to justify funding of any kind, but the more robust applications will meet the diverse criteria available in the alternative markets, and have opportunities to access bespoke, appropriate funding through their own brokers or direct sources despite also having initially engaged with the scheme.

To benchmark my point by comparison, NACFB members were responsible for £20.7 billion of lending in 2016, most of which was prior to the Government enforcing referrals from the banks. This is projected to increase in 2017.

Funding Circle, the UK’s largest ‘peer-to-peer’ lender, which chose to remain independent of the ‘designated online finance platform’, has funded nearly £800 million in 2017 alone, including £182 million through broker introductions, and £14 million funded through direct referrals from the banks since the start of the referral scheme.

I believe that many of those businesses which received the £3.8 million of funding through the scheme, may well have been able to secure more appropriate funding outside the scheme had they not simply taken the route offered by their referring bank.

NACFB Chairman, Paul Goodman seems to agree, stating that the scheme in its current format is “doomed to fail” due to its “sausage machine-like approach”, and commenting “There is no off-the-shelf product in the commercial finance sector – that’s because the needs of small businesses are diverse.”

It would appear the Government acknowledges room for improvement by commissioning a review by Professor Russel Griggs OBE.

Perhaps the success of NACFB and Funding Circle will encourage him to open a few more doors.

SDR - 09.17

26th SEP
2017