George Osborne orders SME business loan shake-up

George Osborne is to order a shake-up of the banking sector to make it easier for small and medium-sized enterprises (SMEs) to secure the funding they need. Plans have recently been confirmed to introduce legislation which aims to improve access to business funding and increase competition in the financial services sector.

UK businesses that have struggled under the weight of the recession are now looking to expand in an improving economic climate. However, their attempts to capitalise on new opportunities are currently being undermined by the general reluctance of the high street banks to lend. The banks' current aversion to risk is a hangover from the recent economic crisis, which was largely the result of irresponsible lending.

Osborne's shake-up will mean banks that reject funding applications from small and medium-sized enterprises will be forced to refer them to other sources of funding available online, some of which are featured on Everline's business loans explained page.

The banks' reluctance to lend
Recent research from the Federation of Small Businesses (FSB) has found that 42 percent of all those who apply for a loan from a high street bank or building society were turned down. The British Bankers' Association however was quick to dismiss these findings, claiming that lenders were continuing to provide credit to customers.

The Bank of England's quarterly report seems to support the findings of the FSB. Despite showing an improvement in credit conditions for businesses in general, with net lending increasing in the quarter to May 2014, SME lending is down by £200 million in the same time period. So, while the banks may be willing to lend to big businesses, it seems they are still reluctant to fund riskier smaller enterprises.

The new rules
The move from the chancellor is part of a greater effort to boost the level of competition in the financial services sector. Currently, the UK's four biggest banks hold 85 percent of business current accounts and provide 90 percent of business loans.

Following research that suggests new entrants face unsurpassable barriers to entry, the Competition and Markets Authority has recommended an inquiry into business lending and current accounts. It is hoped the findings will help to ease the tight grip the leading lenders have on the market.

In a bid to increase the level of competition in the market, under new rules in the Small Business, Enterprise and Employment Bill, any bank that rejects a loan application from an SME will have to ask the prospective borrower whether they'd like their information shared with designated online lending platforms.

The platforms will then match businesses to other suitable sources of finance, such as peer-to-peer lenders and crowd-funding sites to help them source the affordable capital they need.

British Business Bank receives £100million extension
The government-run British Business Bank, which was setup to try and address the lending gaps for smaller businesses, has recently won a £100million extension. Unfortunately given the current lending shortfall, that's a drop in the ocean for the UK's SMEs.

Mr Osborne and business secretary Vince Cable have been looking closely at whether setting mandatory requirements for banks to refer businesses to alternative sources of finance if their application for a loan is rejected is feasible. The banks were quick to warn the pair that implementing such legislation would be expensive and complicated.

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 banks still dominate and small businesses often give up if they're turned down for finance by their bank."

The author, Damien Metcalfe, is a business owner and part-time blogger who covers the latest finance and tech news for small businesses.

Have you been refused a business loan by your bank? Did you try to secure the funds from alternative sources? If so, were you successful? Please leave your thoughts in comments section below.