The news comes after the government revealed earlier this month a system in which SMEs would be matched with alternative finance lenders when they are turned down for funding by banks. 

What constitutes a bank turndown? 

However, according to Colin Goldstein, head of strategic partnerships at iwoca, one of the alternative lenders in the scheme, the exact interpretations of what constitutes being declined for credit has caused the banks much debate and complexity in implementing the scheme.

“Any customers who are formally rejected after completing a credit application are certainly now being offered the opportunity to be referred. 

“It is less clear what happens to customers that do not formally complete a credit application.”

Andrew Holgate, co-founder and chief credit officer at Assetz Capital had similar concerns. 

"The general rule is when it is declined by the bank.  But when is it declined?  

“Is it at the point where the relationship manager (RM) and the customer are having an informal chat over lunch and the RM says: ‘That won’t work for the bank’, or is it at the formal credit application stage.  

“The latter is easy to police and make referrals off, the former is almost impossible to police.”

When do banks direct SMEs towards alternative lenders?

RBS, Lloyds, HSBC, Barclays, Santander, Clydesdale and Yorkshire Bank, Bank of Ireland, Danske Bank and First Direct are all now required to offer access to alternative finance providers under the new scheme.

•   P2P criteria could become stricter due to matchmaking tool, warns lender
•   Chancellor announces alternative finance matchmaking tool
•   Funding Circle joins SME matchmaker platform

RBS, Lloyds, HSBC and Danske Bank all responded to Bridging & Commercial’s request to find out when it turns an SME to an alternative finance provider. 

Danske Bank simply said that it would refer an SME at the point it declined the application. 

RBS said that the offer of a referral happened at the point a customer is informed that their application for funding had not been successful. 

It also said it had its own panel of providers called Capital Connections, who it can offer to refer customers to.

“We provide information on the lenders, so the customer can decide which ones might be right for them. 

“However, just to be clear, we don’t do any matching ourselves. 

“Customers can also choose to contact the designated platforms or any of our panel members directly themselves.”

Bank of Ireland stated: “In Northern Ireland, Bank of Ireland UK would seek consent from the SME to refer them to the three finance platforms when the customer is advised that the application has been unsuccessful or declined.  

“The SME may not consent to be referred, in which case they will be given details on how to self-refer if they change their mind or if consent is provided, the SME may decide to proceed with one or more of the platforms.”

HSBC said that it would refer once a business application was unsuccessful. 

Finally, Lloyds stated that customers can ask to be referred if they have received a decline following a formal application or if they have been told informally that their lending request is unlikely to be approved.

SMEs would also not be required to appeal before asking for a referral to the scheme. 

How can the referral system be improved? 

Colin felt the scheme would work and improve finance options for SMEs if it was implemented well.

“The key is the quality of conversation the bank has with the customer at the point of rejecting them. 

“The customers will not consent to being referred unless the bank pitches this effectively and positively. 

“How well banks do this, only time will tell.”

Andrew felt the system would eventually work, but the customer may reject the idea of a referral and ask not to be referred.

“NatWest has a system where it also has its own approved alternative lenders (including Assetz Capital), which it has vetted as good companies to deal with.  

“The bank working more closely with its panel should forge better relations between the frontline (where the declines will happen) and the alternative lenders.  

“That will make the real difference to customers.”