On 6 August, it will be a year to the day since the Government announced it would bring in new rules requiring all high-street banks to automatically direct small businesses turned down for credit towards providers of alternative finance. But while you might think 12 months would be long enough to get a referrals system of this sort up and running, we’re still miles away from the launch of this important initiative.
The referrals system is supposed to address two separate problems: first, that many small firms cannot find the finance they need from conventional lenders; and second, that while the alternative finance sector is stepping into this gap, awareness of the options remains low.
Both those issues remain acute. The Bank of England said last week that the total amount of lending to all non-financial small businesses rose just £400m during June, a drop in the ocean against total bank lending of £163.8bn – and lending is currently falling at an annualised rate of 0.6 per cent. Meanwhile, research conducted by UK Bond Network last month found 42 per cent of firms did not know what was available to them in terms of alternative finance.
We need solutions urgently if small firms are to secure the funding they need to exploit the opportunities afforded by the UK’s economic recovery. But it wasn’t until last week that the British Business Bank, the organisation responsible for setting up the new system, announced it had put together a shortlist of potential providers of the “neutral finance platform” that will co-ordinate referrals – matching firms passed on from the banks with alternative finance providers.
Can we expect an appointment soon? Probably not – the shortlist is really a long list of providers that have signalled their interest and met some basic criteria.
In the meantime, the banking sector continues to argue over the exact detail of how the new scheme will work, prompting suspicion that some are hoping it proves dysfunctional. Some banks say they should only be making a referral once a small firm has been all the way through every stage of their application process, exhausting every option.
This could even mean small businesses are not referred unless they have appealed against the rejection of their credit application – only 2 per cent of firms file such appeals.
It’s difficult to imagine the British Business Bank being able to launch the new system before 2016 – and even then the destructive influence of a number of banks determined to stick a spanner in the works threatens to undermine the regime. At this rate, the upswing in the economic cycle will be over before many small firms have had an opportunity to take advantage of it.
Alternative finance providers are capable of addressing the funding shortfall, but not if small businesses don’t know about them. While the sector has grown rapidly in the past three years, it remains tiny: it has so far provided funding of less than £2bn to fewer than 10,000 small businesses.
George Osborne’s Budget last month didn’t do small businesses many favours, missing an opportunity to tackle the problems of business rates and late payments. Now comes his opportunity to make amends: the referrals system was originally a Treasury initiative and it requires intervention to get things moving.
Auto-enrolment at risk of 'bending and breaking'
Where do 500,000 small businesses hide themselves? It’s a question one might ask the Pensions Regulator, which has just updated its assessment of how many employers are affected by auto-enrolment. The watchdog had previously thought 1.3 million small and medium-sized were preparing for the system, under which every employer is required to set up a pension scheme for staff by 2017 – but it now thinks the real number is 1.8 million.
The rise is partly down to better than expected economic growth, with more companies being set up and trading successfully than in previous years. However, the huge increase in the regulator’s estimate worries many pension professionals, who think the sector doesn’t have the resources to cope with demand – particularly as many small firms seem to be leaving it very late to prepare.
“It’s going to be an unprecedented rush, with vast numbers of SME owners with no previous pensions experience setting up a scheme for their employees,” warns Will Wynne, managing director of Smart Pension, the adviser. “Pensions is a slow-moving market and nearly all existing pension firms rely very heavily on traditional, manual processes which are likely to bend and break under the strain.”
How the Chancellor could be outfoxed on buy-to-let relief
Britain’s mortgage lenders are gearing up for a surge in demand from limited companies hoping to get round the Budget crackdown on tax relief on buy-to-let loans. Last month, the Chancellor announced that from April 2017 investors who take out buy-to-let mortgages will only be able to claim basic-rate tax relief against the interest payments. However, the restriction does not apply to mortgages taken out by investors set up as companies.
Lenders now offer around 120 products specifically for limited companies, and David Whittaker, managing director of Mortgages for Business, pointed out: “A good number of landlords and investors will have the opportunity to outfox the Budget by taking advantage of the tax benefits associated with registering as a limited company. Even if the mortgage costs are above the rest of the market, this could come down as demand grows and lending to companies becomes more competitive.”Reuse content