The Corporate Finance Network is calling upon the Government to abandon their Government Referral Scheme after 95% of SME applications for loans were rejected, calling it “a harmful policy that generates so much cost and bureaucracy“.
The Government Referral Scheme was launched after an announcement by the Chancellor in the 2016 Spring Budget. It legally requires any of the main seven banks to refer businesses they turn down for funding to one of four designated online platforms (Alternative Business Funding, Funding Options, Funding Xchange and Business Finance Compared).
Statistics from HM Treasury show that during the first 20 months of the scheme, 19,000 UK SME businesses were referred, but only 900 were successful at getting funding (at an average of £17,000) and accounting for a total of £15.6 million in total funding (up to mid 2018, the latest period data is available for).
Kirsty McGregor, the Chairman of The Corporate Finance Network, a UK-wide group of accountancy firms providing specialist financial advice to SMEs on funding, warns that the policy is both wrong-headed and a huge waste of public money through all the work involved in handing out meagre amounts to desperate businesses.
BRS costs being hidden by spurious use of confidentiality to thwart FOI requests
Regarding the costs of the Bank Referral Scheme, Kirsty says: “All the costs of administering the BRS are met by the taxpayer, including the assessing of at least 19,000 applications so far. I have sought this cost with a Freedom of Information request, but the Treasury claims it is commercially confidential.
“This seems pretty spurious as the only entities involved are the Treasury and the British Business Bank, both of which are government owned. Sadly, it is more likely the case that the costs are embarrassingly high and they don’t want this revealed.”
BRS encourages pricey finance from racylenders to desperate SME businesses
Kirsty says: “This whole policy seems immoral. It sounds good in theory that businesses who are rejected for funding by the banks should be offered other options.
“But the reality is by this stage such businesses have generally spent 4-6 months in the funding process and are getting desperate for the finance. If they are offered high-cost finance from another lender, they will not surprisingly be very tempted to take it to tackle a short-term need while building up even bigger problems for the future. Instead most need support and advice to address their rising costs and to implement some type of restructuring of their business so they have lower costs that match our difficult and uncertain economic times. There is no requirement within the Government’s policy to bring in advice for these struggling companies.
“There is a growing breed of online funders, some of whom offer high rates of interest and fees, often 2-3% per month, compared to say 8% per year from a more traditional lender, and I believe the Government is only encouraging our small businesses to take finance which they can ill-afford. So you can argue the policy’s failure is good as very few businesses have ended up with potentially pricey loans.”
Source: The Corporate Finance Network