Imagine living in a country where your bank told you about hundreds of alternative finance providers. There's a quiet revolution starting in the UK in the area of business finance. Legislation has just been passed which will oblige banks to refer businesses they have rejected for finance to online alternative finance providers.
As a reader of AltFi, you already know the alternative finance space is growing: funding facilitated by online providers has increased year-on-year by over 150% in the period 2012-2014, according to Nesta. Yet businesses remain unaware of these opportunities: our research shows that just 32% of smaller businesses are aware of crowdfunding, and only 35% are aware of peer-to-peer lending. And no wonder really - after all, people running businesses are busy running their business.
That's why the default of businesses is to turn to the banks - regardless of whether bank finance is the best or even the most appropriate option. Research for the British Business Bank’s Small Finance Markets 2014 report found that over 90% of business loans by volume still derive from the Big Four – these banks currently provide nine out of every ten business loans. For some businesses, bank finance is clearly the right way forward - but it's not always the case.
It is to address this problem that the British Business Bank, on behalf of HM Treasury, is trying a different way forward: one that recognises firms' behaviour and works with the market.
In future, the ten major banks across the UK will have to offer any business whose loan application they have rejected a referral to some new online platforms. These online platforms will act as match-makers: they will put those businesses’ requirements to a range of alternative finance providers, who will then have the opportunity to offer them the finance they need. We've just asked for prospective match-makers to put themselves forward for a selection process with a view to the system going live next year.
This is a win-win-win situation, which we see in the positive approach that all parties involved are taking - including the banks themselves. After all businesses get the finance they need to grow, alternative funders sell more products, but banks have happier customers too. Ones who will remember they got a "we know someone who can help you" and not a straight no.
Andrew Van Der Lem, Managing Director, British Business Bank