UK Elections Threaten To Stymie SME Lending Rules

The U.K.’s new Small Business, Employment & Enterprise Act is vast, covering an array of efforts aimed at increasing small businesses’ access to working capital. But one of the most discussed and debated aspects of the new rules, which went into effect last month, includes a provision that requires mainstream banks to refer small businesses to alternative sources of finance if they are rejected for a loan.

According to reports, that scheme could open the doors for about $3 million worth of financing for small enterprises. That is, if the rules actually work.

New findings from U.K. alternative finance group Alternative Business Funding, the law could allow 100,000 SMEs to access financing from alternative lenders if the regulations are properly enforced. That’s a big “if,” however, as the U.K. braces for the general election next month, leaving uncertainty over who will enter office.

“It is vitally important that the party or coalition government elected in May drives the implementation phase through as quickly as possible,” said Adam Tavener, the chairman of ABF finance partner pensionledfunding.com. “This increase in alternative funding will double the size of the U.K.’s thriving alternative funding sector.”

Collectively, this new access to credit for small businesses could lead to $3 billion in additional financing for SMEs that might otherwise be strapped for cash if rejected by a bank.

But many members of the financial community, including alternative financers, are skeptical that the referral scheme will actually work as intended. In a recent roundtable discussion on the topic headed by Boost Capital, reports said that experts are most concerned that this referral to an alternative lender may only take place after an exhausting loan application process, by which time small businesses may be inclined to give up on gaining financing altogether.

“Much of our industry feels frustrated at the time the bank referral scheme is taking to materialize,” Norman Carson, Boost Capital Director of Business Development, said last month. “The key issue is the way in which the system may be administered by banks themselves. If SMEs do not get referred until after a long decision process, I fear it will destroy the referral program before it gets started.”