Should Banks Refer Declined Business Owners to Alternative Capital?
In an article that appeared on the Forbes website, Lendio CEO Brock Blake pointed to the UK’s adoption of rules wherein banks will be made to refer businesses that they decline for loans to alternative lenders, musing that a similar program might have beneficial effects on the US economy. Currently while lending statistics have been slowly rising, they are still below pre-recession levels and business owners who are in the smallest size category have not seen many gains at all, with around a 90% rejection rate according to the article.
If you reject an application, do you still have a duty to direct them to funding? That seems to be the stance of the UK government. Rather than simply reject an application, informing the business owners of other possible options that they may not have known they had can increase the number of businesses that actually get the capital they have been looking for by a dramatic margin. Apart from the fact that businesses may still need funding despite being rejected by their bank, the technology being employed by the alternative lending sector has been cited as a potential source of long needed innovations in the small business lending industry by no less than former SBA chief Karen Mills. Losing business to alternative lenders may be the call to action needed to get banks to rethink the way they do business, or rather don’t, with the most underserved small business owners.
While UK is one thing, would this type of rule be possible in the US? Though referring small business owners to alternative lenders may be pragmatic, it’s not entirely clear that this practice is something that could easily translate to the American credit market. However, as alternative lending continues to gain popularity and recognition as an option for small business owners, referrals from major banks may be slated to become more common without the need for legislative mandates.
Photo Credit to Ofer Deshe on Flickr