The disappointing performance of the Mandatory Bank Referrals programme, introduced in 2015 to connect businesses rejected by their banks with alternative lenders, points at a fundamental misunderstanding of why businesses are getting declined. Today, 94% of businesses declined by banks are subsequently declined by alternative lenders – as these businesses do not have a fundable profile. Funding Xchange (FXE) research shows that, despite multiple declines, many business owners don’t know why they have been declined or what they can do to improve their ability to access finance.
The result is that small and medium sized businesses in the UK are missing out on as much as ~£3B in potential funding by not taking simple actions to boost their credit profiles and demonstrate that they have robust financial management in place, according to a review of UK businesses conducted by FXE.
The small and medium sized business lending market has changed substantially over the last decade with a greater range of debt finance providers than ever before. Smaller business lending was heavily concentrated in 2014, with the majority of lending coming from just four large lenders. Alternative providers now account for around 60% of the market according to Bank of England data reported by the British Business Bank. This is a huge change that has benefited businesses that are ready to access finance. However, it has exacerbated the issue for those 94% of referred customers who are not ready to access finance. Businesses are finding it harder to demonstrate fundability due to the economic climate and higher interest rates and business owners have far less professional experience (on average, first-time directors are ten years younger than their peers in 2000).
As lenders have increasingly moved towards digital fulfilment, small business owners lack the informal personal support that in the past would have guided them on what a lender expects from the business to be able to extend a loan.
The upcoming review of the Mandatory Bank Referral programme in 2025, announced as part of the Government’s budget, provides an opportunity to address the underlying issues that are today holding back businesses from accessing finance.
Funding Xchange (FXE) examined the profiles of ~7,000 businesses declined for bank funding in the last 18 months and found that ~50% have “readily fixable” profiles that could turn the ‘no’ they received into a ‘yes’. Businesses are ‘missing out’ on more than ~£3B of potential funding when scaled to the full SME population – funding that would otherwise support the growth of businesses that are the backbone of the British economy.
Examples of “readily fixable” issues, include excessive use of overdrafts, missing payments to suppliers, filing accounts late with Companies House and filing accounts showing a net negative asset position.
Unfortunately, most business owners lack the feedback and support to avoid these common pitfalls. Compared to the consumer lending space, there are few tools or services that provide simple, impartial feedback on their profile before they apply for finance.
“If I missed a payment, I didn’t know how it would really affect my business and…my fundability at end of the day,” the owner of a newsagents in London who recently applied, and was rejected, for a £10k working capital loan, told the FXE team.
Even after being declined for funding, SMEs typically receive little in the way of advice – leaving business owners confused and resigned to the fact that their business is ‘just not good enough’ rather than focused on the practical steps they can take to improve their position.
“The bank is the first port of call. That’s where I would expect some advice,” the owner of an Essex plumbing business who recently applied for a loan told the FXE team. “But they just said no. And that was it…I’ve just had to find things out by having my head slammed into the wall.”
The interviews and review were part of a pilot by FXE and a group of four High Street banks to road-test “Funding Health Checker,” an innovative digital tool offering accurate and personalised feedback to business owners before or after they apply for credit.
Leveraging FXE’s experience with SME credit assessment, Funding Health Checker helps business owners understand how their company is viewed by banks and other providers across six key areas (see graphic at https://cdn.journolink.com/pressroom/14809/media/dd54b224-58e0-4182-82cb-c753b6b63074.png) covering everything from how they handle cash and payments to how they run the business.
Overall, 80% of pilot participants saw a significant improvement in their understanding of the factors affecting the fundability of their business, 85% were likely to take the suggested actions and 90% said they would recommend the tool to a friend or colleague.
Funding Health Checker brings the commercial lending market up to speed with the consumer lending space where highly personalised feedback and support has transformed access to mortgages, personal loans and other financial services products.
Such innovations are more important than ever. Historically, bank staff provided invaluable informal advice and guidance to business owners, but with the closing of ~6,000 bank branches in the last ten years, this source of information is now much less accessible.
Digital tools such as Funding Health Checker can address these gaps and their impact on the ~500,000+ companies formed every year. “I think it is particularly helpful for people who are new to business,” the owner of publishing company in Worcester told the FXE team. “Small business owners are often extremely good at what they actually do – their day-to-day work – but have no idea what it takes to secure access to funding,” she said.
The tool combines data from credit reference agencies, Companies House, and other sources to score the profile of business, flag areas of concern and suggest actions to improve fundability, all in a visual, easy to digest format that borrows from innovations in consumer-focused applications.
“It is great to see all this information brought together ‘all under one roof’,” said the owner of a technology repair shop in Southeast London. “[Funding Health Checker] shows you every aspect you need to know from your personal credit history to your business performance.”
“I’d definitely recommend the tool to a friend or colleagues,” said the owner of a catering business in Birmingham. “You can go to Experian and look at your personal finances and credit score, but this is useful for a business.”
Charlotte Crosswell, Chair of the Centre for Finance, Innovation and Technology (CFIT), commented: “The report by CFIT’s SME Taskforce, published in August 2024, explored how smart data can enhance access to finance for SMEs. It discusses the potential of data-driven innovations to improve lending processes, making it easier for SMEs to secure the funding they need for growth and development and called for the Government to ‘review and improve HM Treasury’s Bank Referral and Commercial Credit Data Sharing (CCDS) Schemes.’
Funding Health Checker provides an exciting example of the innovation driven by Smart Data to address critical pain-points that too many businesses experience when seeking finance. The drive to unlock Open Data will only enhance the propositions that innovative FinTechs like FXE are able to develop.”
Katrin Herrling, CEO and co-founder of Funding Xchange, noted: “Funding Health Checker is the result of supporting 500,000 businesses over the last 10 years and seeing the clear need to make it easy for business owners to put themselves in the best position to access funding.”
