Bank Referral Scheme needs overhaul for SMEs, says UK Finance

UK Finance, which represents 300 firms across the UK, has told the Government that the Bank Referral Scheme (BRS) “no longer effectively meets the needs of today’s dynamic market” and is failing SMEs.

The trade association didn’t pull any punches in its response to the HM Treasury’s consultation on the Bank Referral Scheme, and argued that instead SMEs need “a modern, government-led Access to Finance Hub”. 

The publication of UK Finance’s response comes swiftly after a bid was launched by a group of Labour backbenchers to create a Fair Banking Act, which would monitor and rank banks based on how well they are serving SMEs. 

This response from UK Finance emphasises that traditional banks are no longer playing a key role in financing SME growth, and the Government needs to recognise this. 

Why isn’t the BRS working?

The Bank Referral Scheme kicked off in November 2016, and was designed to help SMEs find alternative funding if their application was rejected by a mainstream lender. However, UK Finance has said the scheme “fails to provide timely, proactive support for SMEs, often leaving them ill-prepared after a rejection and disillusioned with the process.”

In particular, in its response to the Government (PDF), the association argues that take up for the scheme has been really low, “with only 2 to 3 per cent of declined SME applicants taking up a referral.” 

Crucially, of those who do get a referral, only 6% actually obtain finance, which leaves 94% experiencing a “double decline”. 

It was initially suggested that the scheme could unlock up to £1.9bn of additional finance for SMEs. However, over 10 years, it has actually resulted in around £128m shared between 5,400 businesses. “Compared to the £62bn of gross lending to SMEs in 2024 alone, it is now clear that the scheme was only ever going to make a minor contribution,” the UK Finance team said.

The letter stated that the scheme simply hasn’t delivered on expectations, despite a previous independent review of the BRS that recommended improvements to increase takeup – and changes that were made as a result. 

Are big banks still important players in SME funding?

The scheme hasn’t taken into account the fact that the funding landscape has shifted dramatically since it was launched, with SME owners now tending to seek out alternative sources of finance instead of mainstream banks.

As the letter stated: “British Business Bank (BBB) data showed that of the £62.1bn of gross lending to smaller businesses in 2024, £37.3bn was provided by challenger and specialist banks.” 

These organisations are responsible for 60% of gross lending, with this figure having doubled over the last decade. Their lending has exceeded lending from the big five UK banks for four years in a row. 

What is the alternative?

UK Finance is arguing that the scheme needs to be replaced with a platform that would offer far more support and guidance: “This revamped platform could serve as a comprehensive one-stop centre of financial expertise and valuable resource, offering continuous support and guidance throughout the entire business and financial lifecycle, rather than just a reactive referral process.”

UK Finance pointed to the Department for Business and Trade’s (DBT) Backing Your Business campaign as an example of how the platform could run. 

The hub would offer access to education and assessments on financial readiness and allow SMEs to tailor their applications for a greater chance of success. 

With financial literacy among founders a rising concern, UK Finance’s response is a call for a more proactive approach to helping SME owners get the finance that they need to grow. However, what it doesn’t include are suggestions as to how the platform would be financed. 

Although the potential impact for SMEs is tantalising, it isn’t definite. As the Government tightens its belt, SME owners must try to educate themselves as much as possible about their funding options, as it could be a long wait before the BRS is replaced with something more valuable.