Is the Bank Referral Scheme Damaging Small Business Growth?

The Bank Referral Scheme (BRS) was passed into UK law by the Government as part of the Small Business, Enterprise & Employment Act 2015. It made it mandatory for banks who have rejected requests for finance from businesses to share this information on. It’s designed so that the businesses could be connected with alternative sources of funding. But to what extent is it successful?

Why create the Bank Referral Scheme (BRS)?

The BRS was introduced with the intention of stimulating the growth of small businesses in the UK. It was to ensure they had the financial support needed, especially during the delicate start-up phase.

It means that the bigger financial institutions must offer to refer failed funding applicants to one of the three Government approved funding platforms. Whilst the offer of a referral must be made, businesses are not obliged to take it up.

The data behind the BRS

The official statistics of the scheme published by HM Treasury show that 19,000 small businesses have been referred to the scheme since inception. With around 900 securing funding, it means that 95% of those who consent to referral are still being rejected for finance.

The average value of each deal works out at £17,285, and the total amount lent so far is just over £15.5 million. Factoring in the likely costs of enacting the proposal into law, and the associated cost of running the scheme, is it really worth it?

The effect of the BRS

The BRS conversion rates are pretty low. The rate of uptake by businesses has not reached anywhere near expectation. Many applicants are citing lack of knowledge about alternative funding, or are put off by unappealing deals. It also means a considerably extended waiting period, during which time the financing needs still need to be met somehow.

For those that do accept, the type of deals they are offered can be crippling. Interest rates tend to be much higher, or with shorter repayment periods. There are also questions about their suitability for financing, having already been rejected elsewhere.

Alternatives to the alternatives

Those within the the lending industry are suggesting that the efforts of the BRS would be better placed using its resources to educate finance applicants about what else is available.

Reducing the amount of time spent looking for finance would also mean businesses are less likely to accept a poor deal out of desperation, only to find themselves in a much worse financial position.

For many businesses, a financial restructure is often enough to be of similar benefit. Money lending has its place, but not before a good chat with the accountant, it seems.