Cambridge News and Financial Times reported the United Kingdom has created new rules that mandate banks to ask borrowers they turn down if they would like to have their information sent to online (alternative) lenders. This sends the clear message that banks have to find new ways to serve small business borrowers.
What is important about this regulation isn’t that the English government actually did it, but rather why they did it. There are really two drivers behind the decision:
1. Economic Stimulation
It’s a widely accepted that banks are the first stop for small businesses looking for capital to grow and the lion’s share (ninety percent according to some statistics) of the time those businesses are turned away empty handed. The English government recognized the negative economic impact as many small businesses are forced to close their doors because they can’t access the financing they need to grow and thrive.
Let’s be clear. This is not just an issue for our neighbors across the pond, this problem exists right here in the U.S. as well. With 54% of the labor force in the US employed by small businesses, there’s no question regarding the impact small businesses have on our economy and what the closure of small businesses means to millions of Americans.
2. Bank Competition
In England 90% of small business loans are controlled by four banks. This limited competition leaves many business owners out in the cold and forces them to make the hard decision of closing their doors.
Vince Cable, the Business Secretary, said, “Forcing banks to refer businesses to alternative lenders is something I’ve been determined to make happen. It’s good that more SMEs are making use of alternative finance but the big banks still dominate and small businesses often give up if they’re turned down for finance by their bank.”
Although the United States has a few more banks than the four major banks in the UK, the closure or consolidation of many community banks is forcing small businesses into similar situations. Too few banks willing to fund to small institutions forces small businesses to shut their doors.
Under Qualified Lending Referral Solution
The United Kingdom is forcing banks to work with innovative lenders because it is the right thing to do for the economy and competition. We (the people of the United States of America) should not have to wait for the government to make the same type of regulation.
“Innovative lenders,” a term coined by Charles Green of the Coleman Report, are serving a segment that represents the very essence of the American dream. These brave souls are trying to run their own business, a daunting task. When they reach out to their banks for help they are often turned away. Some determined businesses find innovative lenders on their own, but often businesses are forced to close their doors because of lack of funds.
There is a better solution that benefits the innovative lender, the bank and the small business. By referring businesses to innovative lenders, banks can improve customer experience during a delicate time in the business lifecycle. The innovative lender provides financing that allows the business to grow and mature into products the bank can offer. This type of partnership boosts everyone and the economy as a whole.
Finding the Right Referral Partner
Banks have a great opportunity to help small businesses by partnering with companies that serve under-qualified business borrowers, if they find the right partner. There is a growing industry of innovative lenders in the U.S. and it is difficult to find the partner that will be the right fit.
Marketplaces give a single access point to multiple lenders and a better experience to borrowers. Companies focused on the marketplace concept (like Lendio) work with networks of lenders to find multiple options for business owners. This allows the bank to work with a single point of contact, but offer a full array of options.
Relationships with small businesses are too important to risk for banks. They represent deposits, financial services and future loan opportunities. Our economy needs small businesses, just as the UK recognizes. We need to find ways to work together to continue to fuel the American dream of owning a business.