It’s a sad fact that the fate of Britain’s small businesses still overwhelmingly lies in the hands of the high street banks. Despite alternative finance’s best efforts to plug the lending gap for SMEs in the UK in recent years, the big banks still account for 80 per cent of small and medium firms’ main banking relationships. As we know, banks aren’t as keen to lend to small companies as they used to be. And, while I’ve talked on this blog before about the difference that could be made by the Government’s plan to push the banking institutions to refer on failed SME loan applicants to alternative funders, the success of this measure will largely depend on how it is executed, and when.
Much of our industry feels frustrated at the time the bank referral scheme is taking to materialise. It was announced last summer, and no delivery date is yet clear. But another thing that worries those of us with capital earmarked to lend to small businesses is the way in which this system may be administered by the banks themselves. Some insiders suggest that the banks want a process whereby business owners will apply for a bank loan, have their submission assessed and rejected, go through the standard appeal procedure, be turned down again, and only then will their details be passed on to alternative lenders. If this approach is taken in practice, I fear it will destroy the referral programme before it gets started. This positive attempt to link capital-hungry enterprises with lenders that want to do business with them will be certain to fail.
We hear time and again from our small business clients just how onerous the bank loan application process already is to endure. First of all, there are the endless rounds of forms to fill out, plus all of the necessary background and historical data that banks insist on seeing. We’ve sought to dispense with these hurdles for our applications precisely to speed things up, and make the whole experience easier for small firms. Next comes weeks – often months – of waiting for bank loan applicants, while each case is weighed up, and assessed for merit. Or, at least, that’s how long the banking providers’ multiple layers of bureaucracy can take to wade through. And, as we all know, since the economic downturn, the chances of even the most rigorously prepared applications being turned down is very high. For first-time SME borrowers, the rejection rate sits at about 50 per cent.
If all of that wasn’t enough to dent the spirits of the average business owner, those that are rejected for lending, and are then brave enough to attempt the appeal procedure face a further round of administration, time-wasting, and probable disappointment. Those who won’t take a loan rejection lying down can make their case for borrowing to a more senior member of bank staff. But the reality is the banks still hold all the cards, and run their own appeals process. There’s no real independence. About one in three appeals are unsuccessful.
Most importantly, it takes yet more time, and many businesses simply can’t afford to wait around for bankers’ sluggish decision-making to reach its conclusion. Only just over 3,500 businesses rejected for loans by their banks bothered to appeal the decision in the 12 months to March 2014, the latest available figures from independent reviewer Professor Russell Griggs found. That’s out of a total of 181,300 loan applications made during that same period, according to the British Bankers’ Association’s own research. To put this in plain terms, just under two per cent of businesses that apply for loans will use the appeal process, and only 1.3 per cent will be successful in their appeal.
If the bank referral system is only to be accessible and applicable to the tiny handful of business owners who will have the patience to go through this slow, and arduous process, then it will have no meaningful impact on the amount of borrowing made available to SMEs at all. Banks already do some good work in referring on unsuccessful loan applicants to independent commercial finance brokers. So much more could be achieved in a similar vein if the banking institutions truly embrace this opportunity also to introduce their small business customers to innovative finance providers who are keen to fund them, and help them to grow – and to do it fast. Experienced relationship managers have a sixth sense for which business loan applications are likely to be accepted, and those destined for the rejection pile. They could intervene at the very beginning of the application process, save the business owner – and the bank – a lot of time, hassle, and effort, and point a firm towards a lender with whom they could find a happy match.
If banks genuinely want to help Britain’s small firms they need to be more honest about those companies to whom they’re unlikely to lend, and send them on their way – and in the right direction – quickly. This is my hope for the coming months. A system that better serves small firms, that’s fully operational soon, and that gets companies to our doorstep as quickly as possible. We can do the rest, helping small companies to grow, thrive, and fuel the British economy.
Image courtesy of Stuart Miles at FreeDigitalPhotos.net