George Osborne to force banks to promote alternative lenders

However, the Chancellor, the Business Secretary and the Prime Minister are all determined to introduce the rules, according to a source. Government research has found that the majority of small businesses still seek financing from their banks. If they are turned down, most tend to scrap growth plans rather than seek alternative funding. The largest four banks currently have a market share of SME lending of about 85pc.

Alternative lending schemes, from crowd finance, peer to peer lending, and invoice finance, have emerged in response to the credit crunch. Alternative finance in the UK is thought to have grown by 91pc in 2013 and is expected to be worth £1.6bn by the end of the year.

However, experts argue the sector could be far bigger if small firms were directed towards them. A group of seven of the biggest alternative lenders, which includes Zopa, Funding Circle and Platform Black, have recently joined together to form Alternative Business Funding (ABF) to make it easier for small businesses to find them and for banks to refer customers on.

Next week the latest data from the Bank of England’s Funding for Lending Scheme (FLS) are expected to show that banks are responding to political pressure by extending more credit to small firms. However, experts say that lending is still too low.

Louise Beaumont, co-founder of the invoice financing company Platform Black said: “Next week’s figures may well show an uptake but that must take into account the overall long term decline in lending to SMEs that has put a stranglehold on the economy.”

She added: “What we are getting from the Bank of England’s scheme is a mere teaspoon of funding when what we really need is buckets full of money to fuel the economy. Teaspoon by teaspoon funding for SMEs is not the solution.”

The CBI has lobbied the Chancellor to do more to help firms access finance by boosting alternative sources and encouraging more competition in the banking industry.

John Cridland, director general of the CBI, has said: “We need to nurture the UK’s vibrant alternative finance market and encourage even more competition in banking so that businesses can get growth capital.”

At an alternative finance conference in March, Mr Cable said: “Alternative finance is already making a significant impact but it’s a very small share of the credit market. We’re trying to do things, both regulatory things and operating through the business bank. We want to do more.”

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