UK Banks Must Now Refer Rejected Businesses to Other Lenders

  • October 27, 2014

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Banks turn small business owners down for loans every day. Instead of showing all those rejected borrowers the door, doesn’t it make more sense to refer them to a potential lender that might be able to help them?

They sure think so in the UK. Chancellor George Osborne announced new rules this past August that will require banks to help “SMEs” — small and medium-sized enterprises — find alternative sources of financing.

This new legislation came in response to troubling data released by the Bank of England in May. The Bank of England report showed that big banks in England loaned almost $1 billion less to SMEs in the first quarter of this year than they did for the same period last year. To help reverse this trend, the government decided that if banks doesn’t want to lend to small business, it’s only fair they connect business owners with lenders who do.

Here’s how the new rules work: When a bank rejects a small business for a loan, they ask for permission to share the company’s details with another lender who might be able to offer them financing. If the business owner agrees, the bank forwards their information on to other potential lenders, including smaller banks, alternative lenders, and even crowdfunding sites.

As one lender put it, this legislation will “open up the floodgates” for both small businesses and the lenders who actually want to serve them. Another believes it will “get the UK economy firing on all cylinders.”

Here in the US, non-bank lenders are thriving, as many small business owners struggle to find the financing they need at the local bank. Despite the growth of non-bank lenders in the U.S., most small business owners who face big bank rejection don’t know they have other options. Some of them just give up when their traditional loan application is turned down.

Although it’s unlike this would happen in this country, if the US were to follow in the UK’s footsteps and pass similar legislation, it would certainly help facilitate borrower-lender relationships that may never have happened otherwise.