Government to Force Banks to Forward Small Businesses to Alternative Finance Providers

George Osborne and Vince Cable are preparing to push through legislation that will force high-street banks to automatically send small businesses rejected for loans to alternative funding companies.

According to the Telegraph the legislation, which is to be included in the Queen’s speech on June 4, is designed to change the bank’s dominant position in small business lending and boost the role of alternative finance, such as crowdfunding and peer-to-peer lending. Osborne made it clear in his 2014 budget speech that small and mid-sized businesses will play a vital role in the economy’s future and the treasury feel that banks’ dominance is having a negative effect on the growth of this sector.

According to the Telegraph the chancellor and other key government members are determined to passing it and are working towards shutting down the legislation before the speech next week, despite fears the cost and time of implementing such procedures will be high.

A number of reports show banks are still the prominent resource for start-ups and small businesses to go to for finance and exemplify the problems that are occurring due to this. An AXA report released last week showed that 20% of small businesses went to banks for a loan to grow last year and that this was due to a lack of knowledge of alternative finance options. Additionally government research showed that if refused finance from banks, small and mid-sized businesses discard growth plans.

Although there has been making some progress, with the Funding for Lending scheme now focused entirely on small businesses over mortgages, Bank of England figures has continued to show a drop in lending by banks. This combined with the information above demonstrates a need for the government to make changes that enable more businesses to seek alternative funding options.

Phil Orford, chief executive of the Forum of Private Business, emphasised the importance of the collaboration of all bodies to ensure funding options to small businesses:

“The government, the banks, other lenders and business support organisations are all important enablers of growth and need to work together to ensure small businesses are getting the necessary amount of money in the right format.”

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