November 14, 2024
Limited Success of the UK’s SME Loan Referral Scheme #UKFinance

Limited Success of the UK’s SME Loan Referral Scheme #UKFinance

CashNews.co

The UK Treasury’s bank referral scheme, launched in 2016, sought to aid small businesses denied loans by their primary banks. With nine major banks involved, the initiative aimed to redirect these businesses to alternative lenders. However, a recent review shows only a small fraction benefited.

Despite helping over 5,000 businesses secure approximately £128 million in loans, the programme’s impact remains minimal against the broader financial landscape. Critics argue that the scheme’s intentions were noble, but its execution and results fell short of expectations. This analysis delves into the facets of the scheme, highlighting its strengths and weaknesses.

The Bank Referral Scheme: Background and Purpose

In November 2016, the UK Treasury initiated a bank referral scheme to support small businesses struggling to secure loans. The programme involved nine major banks referring declined loan applicants to independent platforms, which would connect them with alternative finance providers. Despite its ambitious goals, the scheme has been criticised for its limited success. The Treasury had anticipated a higher conversion rate, acknowledging the scheme’s actual impact was less than expected.

The initiative aimed to bridge a substantial £22 billion funding gap faced by small and medium enterprises (SMEs) in the UK. However, since its inception, the scheme has facilitated merely 5,387 deals with a total value of around £128 million. Compared to the £4 billion gross SME lending in the recent quarter, these figures represent only a minute fraction. Average loan amounts reached approximately £24,000highlighting the scheme’s limited capacity to meet broader financing needs.

The scheme was originally announced by George Osborne in 2013 but experienced delays due to design disagreements. Eventually launched three years later, it required referred businesses to agree to receive offers from alternative lenders, including online providers and independent finance houses. Despite these arrangements, significant ‘frictions’ such as the need for physical signatures and incomplete referrals persisted, impacting the scheme’s effectiveness.

Criticism and Shortcomings of the Scheme

James Robson, CEO of FundOnionvehemently criticised the initiative, stating it took the government a decade to realise its limited impact. He labelled the monthly arrangement of around £1 million as “not even a drop in the ocean” when considering the vast financing needs of UK SMEs. Robson’s critique underscores the gap between the government’s ambition and the scheme’s reality.

Despite being promoted as a solution to SME financing challenges, the scheme has done little to bridge the gap. With only 5% of referred businesses securing loans, the programme’s efficacy has been called into question. These outcomes suggest the challenges of addressing the financial needs of small businesses remain unaddressed. The stark difference between expectations and actual results reflects systemic issues in the approach.

Katrin Herrling, CEO of Funding Xchange, highlighted specific factors contributing to the scheme’s struggles. Notably, 94% of referred businesses were deemed unfit for finance, primarily due to limited trading history or poor credit ratings. This indicates a mismatch between the intended beneficiaries and the eligibility criteria, further obstructing the scheme’s objectives.

The Treasury’s Response and Defence

Responding to criticisms, the Treasury defended the bank referral scheme by pointing out its success in raising awareness of alternative finance options and enhancing access to smaller lenders. The Treasury maintained the scheme had “generally met its objectives”despite acknowledging the lower than anticipated conversion rate.

The Treasury argued that although the scheme fell short of expected conversion rates, it played a crucial role in informing businesses about diverse financing options and encouraging engagement with smaller lenders. This broader perspective suggests that the scheme’s value could lie in its ability to inform and educate rather than solely providing financial solutions.

However, the Treasury’s defence highlights a tension between educational objectives and practical financing. While awareness is crucial, the pressing need for tangible financial support for small businesses cannot be overlooked. The balance between these outcomes remains a critical consideration in assessing the scheme’s overall success.

Operational Challenges within the Scheme

The scheme’s operational effectiveness has been hampered by several logistical challenges. Among these, the requirement for physical signatures and data quality issues were significant barriers identified by the Treasury, affecting seamless execution.

Concerns over incomplete referrals by some lenders also emerged, further complicating the scheme’s efficiency. These gaps suggest that while the scheme was well-intentioned, its practical execution left much to be desired, impacting its ability to meet original ambitions.

The lack of a feedback mechanism within the scheme has also been a point of contention. Many small businesses are left without explanations for their loan rejections, which clouds understanding and limits opportunities to address shortcomings.

The Impact on Small Businesses

The limited impact of the scheme on small businesses has been a central focus of criticism. For many, the programme’s potential benefits remain largely unrealised, with only 1 in 20 referred businesses securing loans. This paltry success rate underscores the need for more robust financial interventions to support small enterprises.

Small businesses often find themselves in a precarious financial position, making access to loans critical for survival and growth. The scheme’s failure to adequately address these needs signifies a broader issue in the financial sector’s support for SMEs.

The initiative’s inability to match the aspirations of small business owners with practical outcomes has led to significant dissatisfaction and calls for reform. A reassessment of the scheme’s parameters and partner accountability could be necessary steps toward improving access to finance for SMEs.

Reactions from Industry Leaders

Industry leaders have voiced their disappointment with the scheme’s outcomes. Ian Cass, Managing Director of the Forum of Private Business, noted the long-standing disengagement of traditional banks from small business clients as a contributing factor to the scheme’s inefficacy.

The sentiment among industry figures is one of frustration, as the scheme’s design overlooked key factors in effective SME financing. Acknowledging these shortcomings is vital for restructuring efforts, ensuring more impactful financial solutions for small businesses.

Leaders are advocating for a more comprehensive approach to SME financing, encompassing greater transparency, effective feedback mechanisms, and tailored support to meet diverse business needs.

Exploring Alternatives and Future Directions

Given the scheme’s shortcomings, exploring alternative financing solutions for SMEs is imperative. Enhancing collaboration between traditional financial institutions and alternative lenders will be vital in shaping a more inclusive lending environment.

The future of SME financing demands innovative approaches that transcend traditional banking models. Emphasising technology-driven solutions and leveraging data for better risk assessment could unlock new avenues for small business support.

Potential reforms may include revisiting eligibility criteria and integrating feedback systems to refine offerings. These changes could foster a more dynamic and responsive financial landscape, better suited to the evolving needs of SMEs.

A Call for Legislative Action and Policy Change

There is an increasing call for legislative action to address the systemic issues plaguing SME financing schemes. Revisiting current policies and seeking input from industry experts could inform more robust solutions.

Engagement with industry stakeholders is essential in formulating policy changes that reflect the realities and challenges faced by small businesses. By incorporating diverse perspectives, policymakers can develop strategies that promote sustainable growth.

Such legislative reforms could drive a shift in how SME financing is approached, promoting innovative solutions that align with modern business needs. This proactive stance is critical to ensuring small businesses can access the resources they need to thrive.


The Treasury’s referral scheme underscores the complexities of SME financing in the UK. While awareness increased, practical outcomes lagged. A reevaluation, incorporating feedback and legislative support, could enhance the scheme’s efficacy.

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