The government has announced a fourth finance platform to join the scheme for businesses refused finance by a bank to access a wide range of finance providers. Clive Lewis, head of enterprise at ICAEW, outlines how it works.

In November 2016 the government introduced a scheme whereby businesses which had applied to a bank for a loan or an overdraft and had been refused could be referred to three finance platforms offering a wide range of debt finance. 

The announcement on 1 November 2017 was to add a fourth finance platform, Alternative Business Funding Ltd, to the three original platforms which were Funding Xchange, Business Finance Compared and Funding Options.

Why was the scheme introduced?

In the last year, 324,000 small and medium-sized business sought a loan or overdraft, 26% of these were initially declined by their bank and only 3% of those declined were referred to other sources.

Research shows that 71% of businesses seeking finance only ask one lender and, if rejected for finance, many simply give up on investment rather than seek alternative solutions.  

There are approximately 360 providers of finance in the UK, but busy business owners do not have the time to research the market and to decide which type of finance is right for their business. Many will simply seek finance from their local bank and give up if refused.

How does the scheme work? 

If a business approaches one of the major banks and is refused a finance application, the bank is legally required to offer the customer a referral to the three (now four) government approved finance platforms. 

The customer does not have to accept the referral or may choose to be referred to one or more platforms. The scheme operates for debt finance between £1,000 and £25m.

What information does the bank sent to the platform?

  • The business name and contact details
  • The amount and type of finance requested
  • The business' legal structure e.g. sole trader, partnership or limited company
  • The length of time the business has been trading
  • The date the business requires the finance and /or made the application

What does the platform do with the information it receives from the bank?

This information may not be sufficient for the platform to secure an offer of finance, so they may contact the business to ask for additional information.

Each platform will have as finance suppliers, providers of business loans, overdrafts, credit cards, asset finance and invoice finance.  Equity finance providers are not included in the referral scheme.

The platform decides which of the above types of finance will be most appropriate for the business seeking finance. It then makes the referral to those finance suppliers. It is up to each individual finance supplier to decide whether to offer finance to the business and, if so, under what terms.

How does the finances work for the platform and its suppliers?

If the finance supplier makes an offer which is accepted by the business, the platform will receive a commission from the finance supplier to cover the platform’s costs.

The finance supplier receives from the business the payments of interest and repayment of the amount borrowed.

Which banks are covered by the scheme?

The banks required to refer businesses are RBS NatWest, Lloyds, HSBC, Barclays, Santander, Clydesdale and Yorkshire Bank, Bank of Ireland. Danske Bank and First Trust Bank

How successful has the scheme been?

For the first nine months of the referral scheme, there were completed deals worth £4m.

The government hopes that adding a fourth finance platform and, as awareness of the scheme becomes more widespread, the amounts raised will increase.   

How safe are the platforms?

The designated platforms are required to have robust systems in place that protect against loss, corruption, destruction, misuse or unauthorised access of information. The finance platforms have been vetted by the government’s British Business Bank.

Conclusion

The referral scheme was designed to help businesses find appropriate finance without spending time researching the market.

Over time it is anticipated that businesses seeking finance will become more aware of the finance platforms and, possibly, go directly to them as they are able to access all types of debt finance, rather than approaching individual finance providers.

For more information about the scheme, go here.

Get a free advice session

The ICAEW Business Advice Service (BAS) offers businesses or individuals the opportunity of a free advice session. Go to the BAS website and access a list of chartered accountants in your area. Contact one displaying the BAS logo to arrange a meeting and have a free, no obligation discussion on your business or personal financial issues.

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