New SME lending rules to ‘open the flood gates’ for alternative finance

Banks in the UK may soon be forced to help small and medium sized enterprises (SMEs) find alternative sources of finance if they turn them down for loans, under proposed legislation outlined today.

The unveiling of the rules, which are expected to take effect in Autumn, follows a Competitions and Markets Authority (CMA) investigation into business lending.

The CMA found that four banks – Lloyds Banking Group, RSB, HSBC and Barclays – currently account for around 80% of loans given to small businesses.

The CMA concluded by recommending a full inquiry into the lack of competition on the high street, warning that new SME’s often have a tough time accessing the finance they need.

Nor is this a problem that seems to be easing as the economy recovers. Bank of England figures show that net lending to SMEs from high street banks fell by £723 million in the first quarter of 2014.

But under the proposed rules, banks that turn SME’s away would instead have to refer them online to other sources of funding. These will include companies such as challenger banks, direct lenders and crowdfunding sites.

Fleximize, one such alternative finance company, say the legislation could “open the floodgates” for new forms of business lending, which are already growing in popularity.

The London-based direct lender’s own research has found that the total amount loaned to SMEs by alternative funders grew from around £318 million in September 2013 to £852.5 million in June 2014. 

“Empowering finance providers with data would be like pressing the turbo button on the alternative lending market for SMEs – the growth could be explosive,” said Max Chmyshuk, founder and managing partner at Fleximize.

Business secretary Vince Cable added, “Forcing banks to refer businesses to alternative lenders is something I’ve been determined to make happen.

“It’s good that more SMEs are making use of alternative finance but the big banks still dominate and small businesses often give up if they’re turned down for finance by their bank.”

Photo: Images_of_Money via Flickr

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Further reading:

UK banks face full industry inquiry over the lack of high street competition

Alternative finance grows 91% to raise nearly £1bn in 2013

Government should encourage SME lending, says thinktank

Crowdfunding – it’s not all about the money

Alternative finance grows 91% to raise nearly £1bn in 2013