Access to finance remains one of the most persistent obstacles for small and medium-sized enterprises (SMEs). While the private lending market has diversified over the past decade, government intervention continues to play a pivotal role in ensuring that viable businesses are not left behind simply because they lack collateral or traditional credit histories. Two key policy levers in the UK — the Bank Referral Scheme and the Enterprise Finance Guarantee (EFG) — illuminate how policymakers attempt to bridge this lending gap.

In this article, we explore how these schemes operate, assess their effectiveness, and consider the challenges they face as the political and economic landscape shifts.

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1. The Bank Referral Scheme: Opening the Door to Alternative Finance

When the Bank Referral Scheme was introduced in 2016, the goal was straightforward: ensure that SMEs declined for finance by major banks were given a second chance. Under the legislation, the nine largest UK banks are required to offer rejected applicants the option of having their details passed to designated finance platforms. These platforms then match SMEs with alternative lenders, potentially unlocking funding sources such as asset finance, invoice finance, peer-to-peer lending, or unsecured working capital.

How the scheme works in practice

1. An SME applies for finance from a major bank.
2. If the application is declined, the bank must (with consent) refer the business to accredited platforms.
3. These platforms share the opportunity with a network of non-bank lenders.
4. Interested lenders can contact the business with potential offers.

This mechanism was designed to inject transparency into a previously opaque process where “declined” often meant “dead end.” Instead, the scheme aims to ensure that SMEs understand their alternatives.

Effectiveness and uptake

Uptake has grown, although not at the pace initially hoped for. The scheme has successfully connected thousands of SMEs to alternative lenders, but referral numbers remain modest when compared to the volume of business lending applications overall.

Key factors influencing uptake include:

• Low awareness among SMEs — Many small businesses are unaware that the scheme exists.
• Inconsistent bank engagement — Some banks are more proactive than others in explaining referral options.
• Variability in SME readiness — Many declined applicants lack the financial documentation or creditworthiness even alternative lenders require.

Despite these barriers, the scheme has helped embed alternative finance more deeply into the SME ecosystem. For many firms, the referral process has led to funding offers that would otherwise never have materialised.

Issues of moral hazard

While the scheme aims to support SMEs, it also risks banks “filtering out” problematic cases simply to satisfy regulatory requirements. There is also a concern that some lenders using these platforms may be willing to take on higher-risk borrowers at higher pricing — raising questions about SME protection and oversight.

2. The Enterprise Finance Guarantee (EFG): Lending Support Through Government Backing

The EFG scheme sits at the heart of the UK government’s efforts to support viable SMEs lacking adequate collateral. Operating since 2009, EFG offers accredited lenders a 75% government guarantee on loans made to eligible businesses. The guarantee reduces lender risk without removing the borrower’s responsibility to repay.

How the guarantee functions

Instead of providing direct loans, the government shares the risk with banks. If a borrower defaults, the lender can recoup a portion of the loss from the government. This encourages banks to approve cases that would otherwise fall outside their risk appetite.

Practical impact

EFG has supported tens of thousands of businesses over the years — from manufacturers seeking equipment finance to retailers needing working capital. Its design has helped ensure that promising firms are not blocked purely because they lack collateral.

However, impact assessments consistently show that the scheme is under-utilised. Contributing factors include:

• Limited SME awareness — many businesses do not know EFG exists.
• Reluctance among lenders — banks sometimes avoid EFG due to administrative burdens or the complexity of the claim process.
• Perceived stigma — SMEs worry that applying for guaranteed loans signals weakness.

Potential moral hazard

Guarantee schemes can unintentionally introduce distortions:

• Lenders may relax underwriting standards too much, relying on the guarantee as a safety net.
• Borrowers may take on larger debts than they can sustain, assuming the government will shoulder part of the burden.

Carefully calibrated controls and periodic reviews are essential to ensure the scheme continues to serve its intended purpose without unintended consequences.

3. How These Schemes Might Evolve

Both the Bank Referral Scheme and the EFG sit within a shifting political and economic environment. Several factors could influence their future direction:

Economic pressures

Periods of inflation, recession, or interest rate volatility tend to expose the fragility of small business credit markets. In tougher economic times, government-backed mechanisms often become more important — and may see expanded usage or revised parameters.

Political priorities

A government focused on productivity, entrepreneurship, and regional regeneration may seek to:

• Expand guarantee coverage
• Simplify referral pathways
• Extend accreditation to more alternative lenders
• Increase funding caps or eligibility thresholds

Conversely, a fiscally conservative administration may look to reduce exposure or tighten criteria.

Technological and market evolution

The rise of fintech lenders, open banking, and AI-driven credit scoring has changed the lending landscape. These innovations could make the referral process more efficient and reduce dependence on guarantees by improving risk assessment.

Future iterations of the schemes may integrate:

• Real-time data sharing
• Automated eligibility checks
• Direct integration with digital accounting platforms
• Risk-based pricing linked to predictive analytics

4. Are the Schemes Effective Overall?

Both the Bank Referral Scheme and the EFG demonstrate the government’s commitment to ensuring SMEs can access finance, but with mixed results.

Strengths

• Address clear market failures.
• Increase access to diverse funding options.
• Support viable SMEs who lack collateral or traditional metrics.
• Encourage innovation in the lending market.

Weaknesses

• Under-utilisation due to low awareness.
• Administrative burdens for lenders.
• Potential for moral hazard.
• Limited transparency on long-term outcomes.

Ultimately, the success of these schemes hinges on improving awareness, streamlining processes, and ensuring that lenders and SMEs alike fully understand the tools available to them.

Conclusion

Government-backed referral and guarantee schemes are essential components of the UK’s SME finance ecosystem. While far from perfect, they provide important safety nets and pathways that encourage lenders to look beyond traditional credit criteria.

As economic conditions evolve and political priorities shift, these schemes are likely to be revisited, reshaped, and potentially expanded. For now, they remain invaluable — if underutilised — tools in supporting the ambitions, resilience, and growth of SMEs across the country.

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