What is the bank referral scheme?

The Bank Referral Scheme is designed to help smaller businesses access the finance they need to grow.

In this article we’ll outline what the Bank Referral Scheme is, how it works, and which banks and designated platforms are involved in it.

What is the Bank Referral Scheme?

Launched in November 2016, the Bank Referral Scheme is designed to make it easier for smaller businesses to access finance.

Studies found that these businesses typically turn to their primary banking institution when they require funds.

However, if their application for financial assistance is declined, many of these SMEs do not explore other alternatives and simply abandon their quest for capital.

Under the referral scheme, if a small or medium sized business is rejected for finance by one of the big banks they are now obliged to offer the business a referral to an online finance platform.

These platforms may be able to help smaller businesses rejected for finance by larger banks, find the funding they need to grow from alternative finance providers.

The Bank Referral Scheme aims to provide viable businesses, which may not meet the risk criteria of conventional banks, with the necessary financial resources to expand and prosper.

How does the Bank Referral Scheme work?

The Bank Referral Scheme is a three-step process:

1. A business approaches a bank that is participating in the bank referral scheme for an eligible lending facility
2. If the bank is unable to provide you the lending facility, the business will be automatically offered a referral to one of three designated referral platforms. These platforms may be able to help you find the finance your require. If you agree to be referred your details will be passed to the designated referral platform by the end of the next working day
3. The business may be able to secure funding from the lenders present on the referral platform if a suitable match is found.

What businesses are eligible to take part in the Bank Referral Scheme?

The Bank Referral Scheme is available to any business that has been refused finance providing they:

• have a turnover under £25m
• have a UK address
• carry out commercial activities as their main activity
• are not part of a group with an annual turnover of more than £25m.

What banks participate in the Bank Referral Scheme?

There are nine banks involved in the Bank Referral Scheme:

• First Trust Bank
• Bank of Ireland
• Barclays
• Clydesdale Bank
• Danske Bank
• HSBC
• Lloyds Bank
• RBS
• Santander

What are the designated platforms?

When a business is declined finance, a participating bank must offer them a referral to a designated platform.

There are three designated platforms that are a part of the Bank Referral Scheme:

• Alternative Business Funding
• Funding Options
• Funding Xchange

What types of finance does the bank referral scheme cover?

There are a number of different types of finance that the bank referral scheme covers including:

Overdrafts

A business overdraft functions as a credit line on a business bank account, providing additional short-term cash flow beyond what a business can generate from its own capital.

Unlike a business loan that includes fixed repayments and interest, a business overdraft incurs interest only on the overdrawn amount.

The repayment of a business overdraft is flexible, allowing a business to pay it back according to its cash flow situation.

However, it's important to note that a bank reserves the right to request repayment at any time.

The bank may also charge a fee for the overdraft service.

The overdraft limit isn't fixed and can be adjusted based on a business's requirements, subject to approval from the bank.

Learn more about business overdrafts.

Business Loans

A business loan can help your company grow, purchase new equipment, or manage periods of unstable income.

Repayments are usually made in predetermined instalments, which incorporate both the principal amount and the accumulated interest.

This repayment setup helps make budgeting easier for a business whilst supplying the essential capital for business operations or expansion.

Business loan repayment durations are adaptable.

You have the option to choose between short, medium, or long-term loans, with repayment periods typically spanning from one month to 25 years.

The interest rate on the loan can either be fixed or variable.

A fixed interest rate means that the repayment sum stays constant throughout the loan term.

On the other hand, a variable interest rate indicates that the rate can change over time, which will impact the total amount of money a business repays over the repayment period.

It's worth noting that some lenders may require a personal guarantee before they approve a loan application.

They also typically have eligibility criteria that prospective borrowers must meet.

Learn more about business loans.

Invoice finance

Invoice financing is a type of finance where a lender utilises an outstanding invoice as collateral for funding, providing you with rapid access to a portion of the value of that invoice, in some cases within a day.

The sum a lender is willing to advance is dictated by their individual risk assessment criteria.

However, this type of financing allows you to unlock funds for cash flow or investment needs, leveraging an underutilised asset on your balance sheet.

Learn more about invoice finance.

Asset finance

Asset finance is a financial tool that enables businesses to obtain vital assets, replace outdated equipment, or grow their existing operations without straining their cash flow or needing to accumulate substantial working capital beforehand.

This type of finance operates by allowing a business to use assets already on its balance sheet as collateral to finance a purchase.

Being a flexible financial product, asset finance can be adapted to fund a wide array of purchases.

This includes everything from machinery and manufacturing plants to office supplies and IT equipment.

Please note that the Bank referral scheme doesn’t cover operating leases.

Learn more about asset finance.

Credit cards

Business credit cards, tailored specifically for corporate rather than personal use, are important tools in managing a company's financial operations.

They cater to businesses of different sizes and offer a range of benefits.

For small business owners, the use of a business credit card can be helpful in separating personal expenses from business-related costs.

This helps to keep accurate bookkeeping records and streamlining the tax preparation process.

While business credit cards function similarly to personal credit cards, they do exhibit some significant differences.

One key difference is the borrowing limit - it's generally higher on a business credit card as it takes into account both personal income and business revenue.

Moreover, prompt repayments on a business credit card can positively impact your business's credit history.

A strong credit history can make it easier for a business to secure loans or other lines of credit in the future.

Learn more about business credit cards.

Does consenting to a referral impact my credit rating?

Giving your consent will not negatively impact your credit score.

Submitting an application through a specific platform won't have any adverse effect on your credit rating either.

If you apply to one or more lenders, it's probable that each will perform credit checks and consider past searches as part of their risk evaluation process.

However, merely making several credit applications shouldn't typically pose a problem for your credit score.