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Boost For MBA Start-Ups As Banks Forced To Promote FinTech Lenders

Banks that reject funding applications from SMEs will be forced to refer them online to alternative lenders, such as crowdfunding sites and peer-to-peer lenders - which are popular among MBAs.

Sun Aug 10 2014

British banks that reject funding applications from small and medium-sized enterprises will be forced to refer them online to alternative lenders, such as crowdfunding sites and peer-to-peer lenders.

The new legislation, outlined this week, will improve access to SME finance and provide a boost to MBA entrepreneurs, who have increasingly sought alternative means of funding.

Britain’s four biggest banks – Lloyds Banking Group, the Royal Bank of Scotland, HSBC and Barclays – control 85% of business current accounts and 90% of business loans. But it has become more difficult to secure start-up funding and many entrepreneurs have instead sought alternative “FinTech” lenders.

In an inquiry last month, the Competition and Markets Authority warned that new entrants faced significant barriers to accessing funding.

But under the new rules, to be placed in the Small Business, Enterprise and Employment Bill, banks that reject SME loans will have to offer them the chance to share their information with websites.

The sites will then match the businesses seeking loans with challenger banks and peer-to-peer lenders.

“One of the biggest obstacles to SME growth is access to appropriate funding,” said Tracy Ewen, managing director of IGF Invoice Finance.

She added: “Very often the smaller alternative lenders are better placed to judge a business based on its own individual merits and provide a tailored funding structure. Many alternative lenders have been doing this successfully for years, but still find themselves under the radar when businesses seek funding to help them grow.”

Despite government efforts, small businesses continue to shun bank loans, while crowdfunding in the UK has grown exponentially since the financial crisis.

The latest SME Finance Monitor found that just 33% of small firms reported using external finance, such as bank loans and overdrafts. And a further 48% of those surveyed classed themselves as “permanent non-borrowers”, shunning all external finance options.

“Non-bank lending to small businesses has exploded over the last four years and is expected to account for £12 billion per year over the course of the next decade,” said Samir Desai, CEO of Funding Circle, a peer-to-peer lender.

“In June we announced a formal referral partnership with Santander, who will refer small business customers to Funding Circle where we are better placed to help. This acts as a blueprint for how banks and non-bank lenders can work together in the best interests of small business owners.”

The measures are part of a wider bid to encourage economic growth. The SME sector is vital to the UK’s recovery – it employs 24 million people. There has been a rise in MBA students seeking internships and careers in small firms.

“Forcing banks to promote alternative lenders when they can’t provide funding themselves is a logical step to help keep the recovery on track,” said Tracy.

George Osborne, the chancellor, also revealed that the government-run British Business Bank has won a £100 million extension to its investment program to help spurt small businesses.