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The government has announced the launch of its long-awaited Bank Referral Scheme, which aims to help UK small and medium-sized (SMEs) gain greater access to funding options.

The banks are required to offer small businesses they have rejected for finance the opportunity to have details of their funding request shared with designated finance platforms.

The Treasury has designated Funding Xchange as a finance platform, who will be working with nine leading UK banks to help secure funding solutions if the bank is unable to help.

The Government policy aims to help the 25% of small business loan applicants who are initially declined by the banks.

Many of these businesses simply cancel their growth plans rather than explore alternative options that may be more suitable. The British Business Bank estimates that 100,000 businesses have their applications for debt rejected each year, representing a possible funding gap in the UK of £4bn.

Katrin Herrling, co-founder and CEO of Funding Xchange, said: “The launch of the Bank Referral scheme is a significant step in helping the UK’s small businesses source funding more easily. Even if the bank says ‘no’, Funding Xchange will be there to help tens of thousands of small businesses access the best funding solutions that are right for them.

“When we founded Funding Xchange, we started with the need to create transparency of available funding solutions - including terms and pricing - so that business owners can feel in control of the process and confident to move forward. This is already common in the personal finance market but has been lacking in SME funding.

“To achieve the same aim for small businesses, we have developed a unique platform that encourages lenders to compete directly and provide offers to our customers. Both businesses and lenders see the terms offered by different providers – ensuring that a business, for the first time, has the chance to compare all available offers with one simple application.”

Funding Xchange turns the traditional credit process on its head by ensuring lenders come to the business to make offers. The company say business can expect an average saving of £2,000 by comparing pricing from multiple providers – representing 10% of the value of the average loan.

Ms. Herrling added: “We think this solution is particularly suited for the referral process as it gives those business owners who have been declined by banks a realistic view of lenders who want to fund them and the terms offered – building confidence that they understand the terms and pricing before pursuing one particular solution.”

Funding Xchange has gained a renowned group of alliance partners, including MoneySuperMarket and KPMG Small Business Accounting (SBA).

Bivek Sharma, head of KPMG SBA, said: "All too often, the only channel that small businesses explore is acquiring funding through their existing banking relationship - neglecting other lending options that could be far more suited to their structure and business.

“The lack of transparency makes it difficult for SMEs to compare funding options, primarily as a result of the opacity and complexity of lending products and charges.”

James Sherwin Smith, CEO of Growth Street also commented on the new Bank Referrals Scheme, stating that, "Any measure that raises awareness of non-bank business finance and promotes greater competition should be welcomed. However, while we know banks will now have to pass rejected applications for business finance to three designated platforms under this new scheme, it’s unclear what protections are in place to help businesses get the best deal from the proposed alternative finance providers."

He raises the following important questions: "Are the designated platforms required to display offers from all alternative finance providers, so businesses can see the whole market?

"Given that designated platforms are paid commission by the finance providers, does this mean firms will be steered towards high-cost finance providers that either pay the most commission or are the most likely to say yes?

"If the designated platforms are competing with each other for each referral opportunity, will businesses be encouraged to make a quick decision, which could mean that key terms and conditions are glossed over?"

Ulitmately, Smith warns that "Businesses should be vigilant, as this system may result in firms not getting the best deal available, and could potentially result in mis-selling. One aspect that could help protect businesses would be for finance providers to disclose the APR for their product. The Competition and Markets Authority has already ruled in favour of this, but only for unsecured business lending up to £25,000."