One of the tools available in the government’s toolkit and a low-hanging fruit is the Bank Referral Scheme. But the scheme needs a rethink, a rebrand and a relaunch.
In her first speech as chancellor, Rachel Reeves was clear about the new Labour government’s priorities and laid out plans to get Britain building by bringing back compulsory housebuilding targets as part of a wide-ranging plan to reboot the UK economy.
But while discussions around tackling the housing crisis and increasing delivery have become synonymous with planning, planning reform alone will not be enough to get Britain building.
To ensure that housebuilders, especially SME developers, can continue to grow and deliver the housing that the country needs, it is important that they can access the necessary development finance, and that lenders and investors are incentivised to operate in this space.
According to the 2023-24 Home Builders Federation State of Play report, access to finance is becoming increasingly difficult and has been likely influenced by higher interest rates.
Tellingly, 61% of respondents to HBF’s survey said that they considered development finance to be a major or minor barrier to housing delivery — a higher proportion than in previous years.
Therefore, while access to development finance may not pose the same difficulties as some of the other issues such as planning, land supply, and availability of labour and skills, the HBF survey results suggest there is still work to be done and that this issue is of increasing concern.
Increased awareness of finance options
For someone like me who has spent the past 20 years or so working in finance, it’s been fascinating to watch the evolving source of development funding move from banks to challengers following the 2008-09 financial crisis and now to specialist non-bank lenders.
But even though housebuilders now have access to a much wider pool of specialist lenders, we know that many SMEs approach their banks first for lending and when they get refused, they sometimes feel that there is nowhere else to turn for finance.
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This sometimes means that viable, but slightly higher risk or quirky schemes can become stalled due to a lack of lending.
Recommitting to the bank referral scheme
One tangible and practical step that the new government could take would be to recommit to the Bank Referral Scheme, which requires banks that refuse to lend — including RBS, Lloyds, Barclays Bank and HSBC — to refer SMEs to three Government designated finance platforms.
These platforms (Alternative Business Funding, Funding Options, and Funding Xchange) are, in turn, required to share a business’s details, in anonymous form, with alternative finance providers such as specialist developer finance.
Since many SMEs simply aren’t aware of the other lending options available to them, this referral helps to facilitate a conversation between the business and any provider who expresses an interest in supplying finance to them.
The Bank Referral Scheme, introduced by HMRC in November 2016, was hailed as an example of effective collaboration between all members of the lending ecosystem to better serve the SME community: traditional banks, challenger banks and specialist non-bank lenders.
At BLEND, we ourselves funded a residential scheme in Northern Ireland in 2018 that was introduced to us by Barclays via the Bank Referral Scheme.
But overall, the scheme has faced severe challenges and helped relatively few businesses — data is scarce, but a September 2019 report says it was helping fewer than 800 companies a year.
This is why the Bank Referral Scheme needs a rethink, a rebrand and a relaunch – something that the chancellor must address in his Autumn Statement.
It is particularly important to support mid-sized developers because it is often these businesses who build-out the complex and much-needed small schemes in our towns and villages that larger housebuilders avoid. Specialist development finance lenders have a vital role to play in supporting small and medium housebuilders, by easing the funding pressure.
Well-capitalised, agile, and flexible specialist development finance lenders are in a strong position to lend to small and medium-sized housebuilders who need access to finance, so that they can continue building the homes the country needs to address the housing shortage.
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