The Small Business Act 2015

Will the Small Business Act help you grow your business faster with alternative finance?

Is a funding revolution about to rock the UK’s traditional sources of external finance for SMEs? “Revolution” may be an overly colourful word for what is about to happen, but with the Small Business, Enterprise and Employment Act having just received Royal Assent, it is no exaggeration to claim that big changes are afoot.

Royal assent

The good news is that this is the type of change that most business owners will approve of. Although the Act covers a plethora of different things, such as director disqualifications and zero-hour contracts, at its core is a robust component dealing with the problem of access to funding for startups and SMEs. News of the Royal Assent coincides with a new survey from UK Bond Network, which revealed that peer-to-peer lending and other sources of alternative finance are catching on amongst small business owners, of which almost 70 per cent said they would use them to raise capital. For SMEs with annual revenues exceeding £1.1 million, that figure climbs to 94 per cent.

The problem, however, which the researchers themselves noted, is that smaller businesses remain over-reliant on banks and are often unaware that alternative finance choices exist. As we already highlighted earlier this year with our breakdown of the Nesta/Cambridge University Alternative Finance 2014 report, there are plenty of SMEs that do not know of - or use - all the possible finance sources. The new Act should represent a major milestone in rectifying this problem.

A key requirement in the legislation is for the UK’s biggest lenders to refer any SME to whom they have declined a loan to an online finance platform. Administered by the British Business Bank, the platform is tasked with matching the loan-declined SME with providers of alternative finance, conditional upon the SME’s consent, of course. The BBB has already called for Expressions of Interest from these providers.

British Business Bank supporting SMEs

As the British Business Bank’s CEO Keith Morgan put it:

“Smaller business will have a greater choice of provider and chance of securing finance, alternative finance providers will have access to a bigger market of potential clients, and the major banks will be able to offer an additional service to those they initially turn down. The Act is the first law to take such a bold step towards levelling the playing field for smaller businesses, according to business minister Matthew Hancock, who also said that it would ensure that “there’s never been a better time to start and grow a business in the UK.”

Business Secretary Vince Cable gave his verdict on the legislation:

“Small businesses provide jobs for millions of people across the country and are driving the economic recovery. The Small Business Act will create the right environment for small businesses to continue to thrive by giving them greater access to finance to help them innovate and grow, and make it easier for them to export goods and services made in Britain.”

It is hard not to conclude that the post-global meltdown regulatory framework the banks have found themselves caught in has led them to an almost obsessively risk-averse attitude when it comes to helping SMEs to grow, whether in the form of business overdrafts or injections of working capital. What these business owners are now about to find is that a banking “no” is not a dead end but a gateway to a world of high-tech alternative finance – fast, simple and transparent – that they may never have previously known existed.

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