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Loan rejection is a big issue for small businesses – the UK government’s Bank Referral Scheme needs an overhaul

Just over a year on from its launch, the UK’s much-vaunted Bank Referral Scheme hasn’t quite delivered in the way that many were expecting.

As the year races to a close, it’s worth reflecting on the scheme’s limitations as well as the things it has got right since its inception in November 2016.

On balance, the scheme has made some progress against a backdrop of serious economic turbulence and political uncertainty.

2017 has proved to be a trying year for many businesses, particularly SMEs. According to the FSB, the cost of doing business for small firms is now at its highest level since 2014.

Business owners also face the added administrative burden of the government’s workplace pension deadline and the prospect of reporting their tax commitments quarterly, under the government’s Making Tax Digital initiative.

On top of that, the Bank of England’s most recent loan statistics make dismal reading for the nation’s SMEs. Lending to small businesses fell by £0.4 billion in October, increasing the need for the government to provide a robust response to support the fabled ‘backbone of the economy’.

To date, the Bank Referral Scheme has made some progress towards finding a solution to this lending deficit, but could go much further.

Launched 13 months ago, the scheme aims to help businesses that have had loan applications rejected by a number of banks – by instead funneling their cases to three alternative finance platforms.

In August a temperature test of the scheme’s efficacy was taken. It found that just 2.8% of the 8,100 businesses referred through the scheme were ultimately able to draw down finance – that’s £3.8 million lent to small businesses over the course of nine months.

This is proof that the scheme is indeed working, but at a markedly slower rate than expected.

This is fundamentally due to issues in the scheme’s delivery. When the BRS was first being discussed by the Treasury, several options about how rejected funding requests would be dealt with were on the table, before the government settled on the three – now four – finance platforms that the scheme uses today.

By referring small businesses to these platforms, the government essentially overlooked some of the main issues that SMEs face when seeking funding.

First and foremost, no small business’s needs are the same, which is why there is no off-the-shelf financial product in the commercial sector – something which the scheme fails to take into consideration.

Secondly, awareness of the funding options available to small businesses has hamstrung market competition. The CMA found in May 2016 that 90% of SMEs get their business loans from the bank where they have their current account.

The Bank Referral Scheme was initially set up to redress this lack of awareness among small businesses of the finance options outside their main bank, but instead of widening the playing field, the scheme has seemingly only served to channel rejected loans into another bottleneck.

In 2015, before the BRS was introduced, 324,000 small and medium-sized businesses sought a loan or overdraft; of which a quarter (26%) were initially declined by their bank, but only 3% of those who were turned down were referred to other sources for help.

In the face of such poor awareness among businesses of the other options available to them, the scheme was always going to have its work cut out. In the past, small businesses have been rejected for funding and then simply not known where to turn next – the scheme does little to fundamentally redress this feeling of being caught in the system.

Representatives of the scheme have tried to explain away its low lending rates by saying that a large number of small businesses don’t have fully formed business plans, so lending to them represents too much of a risk. That may well be true, but a large part of what sector specialist brokers do is work with brands to flesh out their proposition.

The scheme, with its ‘sausage machine’ approach, doesn’t seem to have the capacity to do this effectively in its current form. All too often this means start-up founders bristling with ideas may well fall at the first hurdle – with no apparent structure to hold them up, these brilliant ideas could well simply fade away.

If the government really does intend to champion small businesses, it needs to create a supportive system that incubates start-ups, nurturing ideas and helping provide the finance they need to grow.

This is proof positive that fresh tack is needed. The cleanest approach would be for the Treasury to expand the scope of the scheme, opening rejected loan applications to brokers.

It’s patently clear that small businesses need an element of guidance when it comes to seeking out lending and that an automated approach isn’t fit for purpose.

Independent commercial finance brokers and their lenders are well set-up to do this and often are able to advise SMEs and start-ups about the type of finance they might need, as well as helping them turn their business ideas into full-blown actionable plans.

Only when this guidance is translated to the market will the scheme truly start to work in a way that benefits the entire small business community.

Source: Asset Finance International

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Get Started: Small businesses more interested in loans

Small businesses are getting more interested in borrowing, but many are still finding it hard to get loans from banks.

That’s the finding of a quarterly survey of small businesses released last week by Pepperdine University’s Graziadio School of Business and Management and Dun & Bradstreet Corp.

An index that measures small companies’ demand for financing, including loans and investment money, rose 3.6 percent to 37.5 from 36.2 in the third quarter. A separate index, which measures their ability to get financing, rose 0.2 percent to 33.1 from 33.

But while demand is up, many owners aren’t in the market for credit. Thirty-eight percent of small companies didn’t get any credit in the last quarter. And small businesses are still finding it harder to get loans than mid-sized ones do — 61 percent of small company owners called debt financing difficult to get versus 31 percent of mid-sized business owners. During the previous three months, 36 percent of small businesses were able to get bank loans, compared to 69 percent of mid-sized companies.

The survey findings show that owners who have shied away from risks like borrowing ever since the election may be feeling more secure about taking on debt. But banks that are adverse to risk, especially given the rules imposed on them by the Dodd-Frank banking law, are still wary about small companies.

On a positive note, many companies wanted financing because they want to grow or acquire another business — 44 percent of small businesses, and 47 percent of mid-sized ones. And 46 percent of small companies and 70 percent of mid-size ones who weren’t trying to raise financing because said they didn’t need the money because their cash flow is good.

The survey, conducted from Oct. 31 to mid-November, questioned 1,341 companies from the Dun & Bradstreet database that have revenue up to $100 million. Dun & Bradstreet compiles credit reports on businesses of all sizes.

ONLINE LEARNING

Business owners with down time the last week of the year might want to do some online learning. There are many free online seminars, workshops and courses they can take on their own, at any time.

SCORE, which sponsors live online seminars, has them archived on its website, www.score.org . The seminars have dealt with topics including marketing, managing, social media and business plans. The organization, which offers free advice to small businesses, also has interactive courses available on its website.

The Small Business Administration also has a variety of online courses, including business basics, and also courses about cybersecurity, customer service, disaster recovery and starting a business. You can find them at www.sba.gov.

Source: Yahoo News UK

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A helping hand for small businesses

A decade after the credit crunch, too many small and medium-sized enterprises (SMEs) in the UK still feel their potential is being hampered by a lack of access to appropriate financing. The government’s Industrial Strategy report, published at the end of November, identified financing issues as a clear problem for SMEs that are looking to grow; surveys of sentiment continue to reveal frustration.

Research from Hitachi Capital Business Finance shows that two-thirds of SMEs with growth plans for the year ahead fear that their expansion plans could be derailed if they cannot secure appropriate finance. A third of SMEs applying for finance aren’t securing enough funding to underpin their investment plans, according to similar research from Close Brothers Group; a quarter of SMEs think funding is still too dear.

The answer may be alternative finance (alt-fi). Traditional lenders remain cautious about expanding their balance sheets, whereas alt-fi volumes are continuing to grow rapidly. A report from the Cambridge Centre for Alternative Finance (CCAF), based at Cambridge University’s Judge Business School, shows the market grew by 43% in 2016, with £4.6bn of funding generated, up from £3.2bn in the previous year. Around three-quarters of this cash went to start-ups and SMEs.

The CCAF suggests that the options for SMEs seeking alt-fi may be much broader than often imagined. Peer-to-peer (P2P) business lending, popularised by platforms such as Funding Circle and RateSetter, generated £1.23bn last year and was the single largest market segment, but other types of alt-fi made a significant impact too. P2P property lending raised almost £1.2bn, an 88% leap on 2015, while invoice trading delivered £452m of SME funding, and equity-based crowdfunding generated a further £272m.

It’s important that SMEs get more help to explore all their options. Under a scheme launched earlier this year, Britain’s banks, which reject as many as one in four applications for SME finance, are required to refer businesses that they turn down for funding to an online platform where alternative providers can offer their services. Several hundred SMEs have already benefited from the initiative, though there have also been concerns that leading banks aren’t fulfilling these requirements. On the right, we look at what to do if you’re turned down for finance.

What to do if your business is turned down for a loan

The big banks are rejecting around 100,000 small businesses each year, denying them access to £4bn of funding, according to figures from the British Business Bank. But if your business is turned down for finance, don’t despair – there may be steps you can take to get your application over the line. If you believe the rejection is unfair, you are entitled to appeal. UK banks now have to follow an appeals process laid down by regulators – independent monitoring of these cases suggests that significant numbers of SMEs are successful. If you’re certain that it is bank finance that your business requires, consider talking to other banks about a loan.

The alternative is to look at other types of funding. If a bank turns down your business for finance, it is now legally required to refer you to alternative providers via the bank referral scheme. With your permission, three online platforms are approved to receive these referrals. These platforms – Funding Options, Business Finance Compared and Funding Xchange – share your information with the alternative-finance providers registered with them in order to match you to a lender that can help.

Source: Money Week

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Cash flow biggest concern among UK SMEs

SMEs in the UK are increasingly concerned about cash flow, with 69% saying it is a key worry.

A market study carried out by Barclaycard showed that around one in five business leaders worry about cash flow ‘always’, while 41% are more worried about cash flow than 18 months ago.

More than one-third (38%) say they expect their level of worry about cash flow to increase over the next 18 months.

The research points to a widespread requirement for financial services, including invoice finance, to smooth out peaks and troughs in business income.

This is particularly the case in sectors which suffer from delayed payments for services, including construction.

Recent analysis by Funding Options, the online business finance supermarket, found that businesses in the UK construction sector have been hit by a leap in payment delays, with invoices taking an average of 69 days to be settled.

Slow payment of bills is a major reason why the construction sector has such a high number of insolvencies; 2,557 construction firms entered insolvency during 2016.

Despite the potential benefits of using finance, fewer than one-third of UK companies say they have used asset finance or plan to use it in the next year.

Niche bank Cambridge & Counties Bank found only 26% of companies surveyed said they were planning on using asset finance over the next 12 months.

Instead, most SME owners have invested personal funds into their companies to avoid borrowing money.

Hitachi Capital Invoice Finance looked at SME attitudes to borrowing and found that 72% of business owners have invested their own funds in the past year, with eight out of 10 using personal savings, around a quarter using credit cards and 12% using overdrafts.

For new start-up businesses, 91% of owners have invested their own money, compared to 69% for more established companies.

The research showed an aversion to borrowing money, with only 17% saying they didn’t mind sourcing finance to fund their business.

The main reason for not wanting to borrow money is that companies want to owe out as little as possible (54%).

Source: Asset Finance International

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Agenda: The perils facing businesses which fail to plan for Brexit

DESPITE the stance adopted by Theresa May’s Government after the recent round of talks we cannot be too optimistic about the potential range of outcomes. The potential for a “disorderly Brexit” remains but now the banks can cope with it, says Bank of England Governor Mark Carney.

Attempting to instil confidence, banks have recently passed stress tests which include a 33 per cent fall in house prices, a rise in interest rates from 0.5 per cent to four per cent within two years and an increase in unemployment from its current 4.3 per cent to 9.5 per cent. But what planning are the banks doing for business customers they support? With no formal “duty of care” to their business customers how might a “sharp” Brexit restrict their ability to fund new money or maintain existing loans to business?

It’s clear that the banks will have a requirement to ensure their own balance sheet remains strong and they must also meet and pass tests as to how much cash reserves they hold. But in the heat of battle decisions must be made. Those small businesses which were trading after the financial crisis of 2008 recall the limitations to how they could invest or grow their business and, in the worst case scenarios how sudden decisions to withdraw from certain sectors saw business failures spilling over into communities: to jobs, livelihoods and families.

Our most recent research has confirmed that, even before Brexit is a reality, bank net lending to small and medium-sized enterprises (SMEs) has been collapsing.

Often SMEs are the ones that are taking the risk in innovation, or in developing new technologies – but in times of recession these types of businesses are often turned away by mainstream lenders when they should be regarded as even more vital to raise productivity and grow the economy out of a downturn.

If banks are stress testing their own businesses, how then are business customers stress testing theirs and working out what they should do? Our interim report, Brexit & Scottish Business, reveals that many businesses are still failing to undertake even the most basic planning for an orderly Brexit never mind the disorderly Brexit that is actively being considered by banks. Business owners cite “uncertainty” as to why they are failing to plan, with some living in the blind hope that Brexit will not take place at all.

Some businesses are taking advice on what to do. That advice is mostly being sought from Government agencies or from business bodies such as the CBI, the Institute of Directors, the Federation of Small Business or their local Chambers of Commerce. Ironically, it is the banks themselves that are being consulted the most infrequently with lack of trust in banks being a prime factor.

Thus, business is often not planning, banks are planning only for themselves and the Bank of England is actively conceding there could be “economic pain” for business and households. “Fail to plan – or plan to fail” is the mantra by which all business, regardless of sector or scale must live. For now that might mean stockpiling cash, ensuring credit lines remain secure and so forth. Diversification could be considered by some. Price rises in supply chains could be modelled to ensure sufficient profit is baked in.

This is a time for action particularly for the small, inexperienced or exposed businesses that have the lowest capital reserves. Businesses no less than banks need to be able to cope with a “disorderly Brexit”.

The uncertainty and lack of planning in business presents both the UK and the Scottish Government with a major policy challenge. Government, too, must take action to support business. As with business, to do nothing would be to invite failure.

Source: Herald Scotland

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56% of SMEs consider securing finance a struggle

More than half of small and medium-sized businesses (SMEs) in the UK are struggling to get the funding they need to help boost investment and productivity, new research has revealed.

According to merchant bank Close Brothers, only four out of ten SMEs have been able to secure funding from their chosen lender.

Of these, 34 per cent felt that the capital available to them wasn’t enough to fund their investment plans, while a further 24 per cent said that the type of funding they had used was too expensive.

Since the financial crisis, Britain’s high street banks have been less willing to lend to small businesses over fears they might default.

However, the market has recently started compensating to some degree with the growth of challenger banks and peer-to-peer lenders – giving businesses more options.

“Lenders could certainly do more,” said  Mike Cherry, chairman of the Federation of Small Businesses.

“One in five of our members had their credit applications turned down in the third quarter, while over half were offered a lending rate of over 4 per cent,” he added.

Adrian Sainsbury, banking division managing director at Close Brothers, said the right funding was “integral” to improving productivity and investment.

“Low productivity hinders economic growth and improving productivity is vital, particularly as the UK prepares to leave the EU. Given their importance to the economy, SMEs will be central to potential productivity gains,” he said.

“SMEs need access to the right finance and support to invest in training staff or adopting new technologies so increasing awareness of financial options is crucial.

“Bespoke funding solutions which align to specific needs and growth plans are always preferable to a one-size-fits-all approach.”

Close Brothers polled nearly 1,500 SME decision makers across the UK, France and Germany.

Its research also revealed that German SMEs were better able to access funding than their UK peers, while French SMEs were less able to do so.

Just 33 per cent of French SMEs were able to access capital through their chosen funding route, compared to 47 per cent of German SMEs.

The current level of UK productivity has flat-lined since the financial crisis.

Last month, the Office for Budget Responsibility downgraded its estimate of productivity growth by 0.6 per cent on average for the years to 2022.

It said that while productivity growth is expected pick up slightly in the future, it will remain significantly lower than its pre-crisis trend rate over the next five years.

This is bad news for UK workers as slower productivity growth means wages will not rise as quickly.

Source: Independent

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Pension funds, small businesses boost growth in UK alternative finance

LONDON (Reuters) – Britain’s alternative finance market grew by 43 percent in 2016, research showed on Friday, with interest from start-ups, small businesses and institutional investors helping to boost demand for services such as crowdfunding and peer-to-peer lending.

Last year, 4.6 billion pounds ($6.2 billion) was raised through alternative channels, up from 3.2 billion pounds in 2015, according to a survey of 8,300 investors and 77 crowdfunding or peer-to-peer platforms.

“Alternative finance has entered the mainstream and is likely here to stay,” said Byran Zhang, executive director of the Cambridge Centre for Alternative Finance (CCAF) at the university’s Judge Business School, which conducted the survey.

Approximately 72 percent of the year’s market volume, or 3.3 billion pounds, was driven by demand from start-ups and small businesses. That was up from 50 percent the year before.

Major banks reined in their lending in the wake of the financial crisis, and many small businesses complain of poor treatment and difficulty accessing funds.

Several alternative finance providers have sprung up to try to fill the gap, such as peer-to-peer lender Funding Circle, which announced this week it had lent more than 3 billion pounds to almost 40,000 businesses since its launch in 2010.

Another, MarketInvoice, offers peer-to-peer loans secured against businesses’ invoices and has lent 1.7 billion pounds since 2011.

ATTRACTING ATTENTION

After peer-to-peer business lending, the biggest categories were peer-to-peer consumer lending, peer-to-peer property lending, invoice trading, equity-based crowdfunding, real-estate crowdfunding and reward-based crowdfunding.

Institutional investors including pension funds, asset managers and banks were also increasingly backing the platforms, the survey showed. Funding from these sources accounted for 34 percent of peer-to-peer property lending, 28 percent of peer-to-peer business lending and 32 percent of peer-to-peer consumer lending.

 Peer-to-peer lending can offer relatively high returns. Funding Circle, for example, currently boasts an all-time average annual return of 6.6 percent.

But the sector’s fast growth has also caught the attention of the Financial Conduct Authority, which is looking at introducing new regulation for the sector, highlighting concerns about past loan losses and due diligence.

This week, peer-to-peer lender RateSetter, the UK’s third-largest, reported a pretax loss of 23.7 million pounds after it took a hit from a bad loan.

Source: UK Reuters

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The UK has the highest number of new business developments in a developed country despite Brexit

  • There were 218,000 new businesses in the UK last year, a 6% rise year-on-year. 
  • Other developed countries saw an average of just a 2% rise. 
  • Crowdfunding and peer-to-peer lending has been credited with this sharp rise in start-ups.

The UK outranked all other major developed economies in terms of the number of businesses established last year, according to figures from accounting group UHY Hacker Young.

It became home to 218,000 more businesses in 2016, a rise of 6% over year-on-year. Meanwhile, other major developed economies including France, Germany, Italy, Japan and the US saw an average 2% rise in number of businesses over the year.

The UK ranked sixth of the 21 countries studied by UHY, behind China, Pakistan, Vietnam, Malta and India. Across all the 21 countries, there was a 7.7% rise in established businesses.

“Enterprise and entrepreneurship in the UK have been gathering pace at impressive speed,” said UHY’s Daniel Hutson.

“As a range of new sources of funding gain traction in the market and the corporation tax burden lightens, the start-up climate is improving, financial pressures are easing and investment for growth is on the cards.”

UHY credited alternative funding sources, such as crowdfunding and peer-to-peer (P2P) lending, with helping to boost the entrepreneurial environment. The Conservative plan to lower corporation tax to 17 per cent by 2020 may also be helping to attract firms to the UK.

“The figures suggest confidence in the economic outlook, despite Brexit. Whether this is sustainable, given the uncertainties that still surround the ongoing negotiations with the EU, will be something the government will want to watch,” said Hutson.

While the UK had a total of 3.9 million businesses within its borders as of the end of 2016, China — which saw a massive increase of 19% — had 26.1 million.

The US fell in 13th place, with the number of businesses increasing by 2.1% over the year to 11m.

Source: Business Insider

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Lender clears £13.2bn of government loan repayments

The company behind Bradford and Bingley and Northern Rock Asset Management has paid back £13.2bn in government loan repayments.

In its six-month results up to 30 September, Bingley-based UK Asset Resolution said that of the £13.2bn repayments, £11bn was from its Financial Services Compensation Scheme debt. The company said that 76% of its government loans have now been repaid.

As part of the plan to repay the FSCS loan, UK Assest Resolution completed the sale of two separate B&B asset portfolios to Prudential and funds managed by Blackstone and launched a further asset sales process that, subject to market conditions and value for money, is expected to repay the loan in full.

Underlying pre- tax profit reduced by 41% to £238m. Mortgage accounts three or more months in arrears, including possessions, reduced by 9% since March 2017 bringing the total reduction to 89% since formation.

Ian Hares, chief executive, said: “In the first half we finalised a major sale of assets and, subsequently, we have launched the next stage of the asset sales programme designed to repay the remaining FSCS debt. These are major steps towards realising our objective of reducing the Balance Sheet while continuing to maximise value for the taxpayer. It is pleasing that we continue to see high levels of service delivered for our customers.”

It was in April that £11bn of the FSCS loan was repaid using the proceeds received from the sale of two separate B&B asset portfolios to Prudential and funds managed by Blackstone. In October, a further asset sales process was launched will enable the repayment of the remaining £4.7bn of the FSCS loan. The transaction is expected to complete during the first half of the 2018/19 financial year.

Since formation in October 2010, the UKAR Balance Sheet has reduced by £94.7bn, including £40.9bn of customer loan repayments and £27.2bn of asset sales, which have facilitated the repayment of £57.5bn of wholesale funding and £36.8bn of government funding.

As at 30 September, lending balances stood at £18.2bn (FY 2016/17: £19.5bn).

Statutory profit reduced to £216.8m from £480.4m reflecting the declining mortgage book, £43.5m additional provisions for PPI claims and the prior year benefiting from a £51.0m profit on sale of loans and an insurance recovery of £50.0m in relation to remediation losses incurred by NRAM in 2012.

The number of mortgage accounts three or more months in arrears, including those in possession, reduced by 9% from 4,617 at March 2017 to 4,196 at 30 September 2017. The total value of arrears owed by customers has fallen by £2.5m from March 2017 to £35.2m, a reduction of 6.6%. This reduction is a direct consequence of proactive arrears management coupled with the continued low interest rate environment.

In total, UKAR has 139,000 customers (FY 2016/17: 148,000), with 149,000 mortgage accounts (FY 2016/17: 158,000) and 32,000 unsecured personal loan accounts (FY 2016/17: 35,000).

The company said that the majority of these loans continued to perform well with more than 93% of mortgage customers up to date with their monthly payments. In addition, UKAR continues to provide oversight of the 98,000 accounts (56,000 customers) sold to Prudential and Blackstone as part of an interim servicing arrangement.

Source: The Business Desk