Raising Finance

Government to connect SMEs with alternative finance providers

2 min read

16 October 2014

The government has published draft legislation that will help connect SMEs with alternative finance providers, giving them a second chance at accessing finance.

Research shows that more than half of SMEs seeking finance for the first time get rejected. What’s more, most of them then do not try again.

The government therefore wants to find ways to change this, as the country can ill afford for small businesses to stagnate. SMEs account for more than half of private sector employment and nearly half of all private sector turnover – the inability of SMEs to access finance is therefore a key issue for the economy.

The legislation, which is being introduced through the Small Business Enterprise and Employment Bill, will introduce measures to help smaller businesses by requiring banks that turn them down for loans to offer these businesses the option to have their key information passed to government-designated platforms that will help match them with alternative lenders.

The concept of a government-designated platform to help SMEs obtain finance will make many entrepreneurs wince, of course, but it is too soon to discount the idea entirely.

The reality is that big high-street banks account for the vast majority of SME banking relationships (more than 80 per cent, in fact). 

In recent years, the growth of alternative forms of credit – ranging from peer-to-peer lending to crowdfunding platforms – is starting to make a dent in funding (admittedly a very, very small dent thus far).

Many small businesses will not consider these alternative options, though, so the government wants to help connect the two.

“A key part of our long term economic plan is to ensure that small businesses are able to access the finance they need to grow and succeed,” says Economic Secretary to the Treasury Andrea Leadsom.

“The best way to deliver this is to increase competition in the sector and remove the barriers to new sources of finance for SMEs. That is why the legislation we’re introducing today is so important, as it will help ensure businesses that want to borrow, and lenders that are ready to lend, can easily find one another.”

The Small Business Enterprise and Employment Bill is expected to come into force in early 2015.