By Mike Yiannis, CEO, Legion Trade Finance

In just a few weeks’ time, legislation could be in place which is set to transform funding for the UK’s small businesses.

The Small Business, Enterprise and Employment Bill contains measures to compel banks to match businesses which have been turned down for loans with alternative finance providers.

This is a major development because according to recent research, most small businesses stop looking if they are turned down by the first funder to whom they apply — in most cases, their bank.

In addition, every year an estimated 250,000 small and medium-sized businesses who would like finance are being told that they don’t meet the banks’ criteria. According to research, only 6 per cent of those who are declined finance are then referred to alterative funders, and just a further 11 per cent offered alternative funding or advice.

And despite much trumpeted initiatives such as the Enterprise Finance Guarantee, official figures show that funding to small businesses continues to fall.
So why aren’t SMEs tapping into the alternatives?
One of the reasons is simply that they aren’t aware of them. But it can also be a question of credibility. Despite everything that has happened in the financial services sector in recent years, businesses know the banks aren’t going to disappear overnight. They are often more wary of alternative funders.

A trusted system whereby banks themselves recommend businesses to funders who can help them would change this perception.

What is more, alternative funding is steadily moving into the mainstream. Alternative lending by online funders to small businesses alone is expected to be worth £1.6bn by the end of the year. These ‘alternative’ funders then, along with the growing number of so-called challenger banks, are becoming both better-known and more trusted.
Such credibility is critical for a referral system to work.

The government itself has talked of ‘designating’ a trusted online portal that will direct businesses towards the most appropriate sources of funding.

Indeed one — Alternative Business Funding - is backed by ten organisations with 85 per cent of the alternative business funding market between them. It’s also been involved in discussions steering government policy on non-bank finance.

The Small Business, Enterprise and Employment Bill is a welcome acknowledgement of the crucial role played by SMEs in the economy, and it is encouraging that alternative finance is not only being addressed but also advocated by the government.

Now we need to foster a supportive mind-set not only in Westminster but amongst the banks, alternative financers and investors alike. Taking the ‘alternative’ out of ‘alternative finance’ and nurturing a sense of collective responsibility for UK business growth will not only save SMEs time researching their options, but it may also deter them from giving up at the first hurdle.