The gulf between UK SMEs and traditional financial institutions widened yesterday, as Chancellor George Osborne outlined that new rules requiring UK banks to refer failed SME loan applications to alternative lenders are soon to be implemented.

The Chancellor’s announcement has provided another lifeline to SMEs and sent out a warning shot to more traditional financial institutions, to whom small businesses look to for funding, that they need to shape up and innovate or be forced to recommend applications to their rivals.

The new rules, which have been in a consultation period for the last few months, are reported to be rolled out later this year. The Chancellor gave the green light to the plans whilst launching financial technology (fintech) trade body, Innovate Finance, in Canary Wharf.

The aim of the body, which brings together representatives from leading fintech start-ups and banks, is to promote the UK’s rapidly growing fintech sector. Innovate Finance will host a platform which will refer SMEs to alternative lenders.

SMEs’ search for funding can often come to a prolonged close as many get rejected several months into an application has been lodged. “Osborne’s plan to require banks to refer rejected SME borrowers to alternative providers is good in principle, but part of the problem with banks is that they often take several months to approve or reject a loan application, compared to around two weeks for most alternative finance providers. As a result, many rejected businesses will have wasted three months already, and will often have missed the opportunity that they needed the money for,” comments Stuart Law, CEO and founder of Assetz Capital.

Alternative lender Fleximize has welcomed the announcement and believes that it will “open up the floodgates” to new forms of lending for businesses. Analysis by the peer-to-peer lender shows that the total amount provided to SMEs by alternative online funders grew from around £318mn in September 2013 to £852.5mn in June 2014 – a rise of 168%. By the end of August, Fleximize estimates that online alternative business lenders will have provided funding of over £1bn.