SMEs to be offered alternative government-approved finance

Small businesses will now be directed to alternative, government-approved, private sector financial sources that themselves will need to pass a set of minimum standards designed to ensure the SME remains in control and is properly protected throughout the process.

Currently, the largest four banks account for more than 80% of UK SMEs’ main banking relationships, and evidence suggests that the majority of SMEs approach only their main bank for finance, with around 40% giving up their search if they are unsuccessful.

In its latest consultation, the government says that a proportion of SMEs rejected by the largest UK lenders are viable businesses, and are rejected simply because they do not meet the risk profiles of those banks.

The result is a market failure of imperfect information, whereby in many cases challenger banks and other providers of finance cannot offer finance to smaller businesses because they are not aware of their existence, and SMEs are similarly unaware of these alternative sources of finance.

Detailed regulation of the process, the government says, will be set out in secondary legislation following the passage of the Small Business, Enterprise and Employment Bill.

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