Enterprise Finance Guarantee scheme explained
What is it and how can it help you secure a business bank loan?
The global economic crisis that shook the banks so fiercely in 2008 was bad news for small businesses seeking loans. Since the world's economies went into meltdown four years ago, many small firms have found it fiendishly difficult to get the finance they need – even though the government has introduced a raft of initiatives to encourage the banks to lend.
What is the Enterprise Finance Guarantee scheme?
One of the most notable initiatives has been the Enterprise Finance Guarantee scheme (EFG), which is essentially a reworking of the old Small Firms Loan Guarantee scheme. Launched in January 2009, and now run by the government’s British Business Bank, the loan scheme provides a government guarantee to boost the credibility of small business loan applications. Since its launch, the scheme has provided a total value of £2.63bn to over 25,000 economically viable small businesses.
Although established small and mid-sized companies have benefited the most from the scheme, start-ups in the first three years of business accounted for 37% of all loans offered, with 17% attributed to businesses within their first three months.
The scheme has recently seen a steep decline in lending as due to improving credit conditions, some bank loans which may have required the guarantee during the credit crunch are now being offered without the need to use the scheme. Despite this, around £56m of loans were drawn down by businesses in the quarter up to the end of December 2015.
How the Enterprise Finance Guarantee scheme works
Like any normal lending arrangement, the cash for an Enterprise Finance Guarantee loan comes from the bank (or, under the widened scheme, the community development institution); but the government will underwrite 75% of the loan, which in theory means you have a chance of securing a business loan even if you don't have the collateral to back it up.
Loans range in size from £1,000 to £1m, and the timespan can range from three months to 10 years. You can choose to receive the loan in a lump sum, or break it up into regular chunks to suit your business strategy.
The scheme is designed to suit all sorts of needs and circumstances. You can access the finance for:
- New term loans. Term business loans are typically used to bolster a company's working capital or if you want to invest in projects, such as research and development (R&D). The loans are unsecured or partially secured.
- Refinancing an existing loan. This can be applied for if you are struggling to make repayments on a loan due to cashflow constraints. Alternatively, an existing loan may be at risk due to the falling value of the security used to secure it originally.
- Converting an overdraft into a term loan. Where your business is low on working capital turning an overdraft into a term loan can release capacity in the overdraft to meet those needs.
- Invoice finance guarantee. Businesses that are already using an invoice finance facility – so getting an advance of cash based on a percentage of an unpaid invoice – can use the scheme to guarantee an additional debtor book advance from their provider. These guarantees are available for terms of up to three years.
- Overdraft guarantee. Similar to the above in that the scheme can provide a guarantee on a new or existing facility, in this case an overdraft. In such cases it's likely that your business would not have the security to meet the requirements of the lender but is deemed to be a viable company. These guarantees are available for terms of up to two years.
In addition to the standard capital and interest payments demanded by the lender, Enterprise Finance Guarantee loan recipients have to pay a premium. This is usually equivalent to 2% per annum on the outstanding balance of the loan, and is assessed and collected quarterly throughout the loan's lifespan.
In an attempt to counteract the decline in lending, the scheme has widened its scope. Under the original terms of the scheme, a government guarantee was only available to a small list of pre-approved banks – but now a much larger number of banks are able to receive the guarantee, and the scheme has also been extended to small community development finance institutions. A full list of the EFG lenders can be found here:
The government has also extended the period in which Enterprise Finance Guarantee loans will be available. It will now run until 2017.
Who can apply for a loan using the scheme, and who decides?
The scheme is open to businesses with an annual turnover of no more than £41m, which ensures plenty of scope for start-ups and early stage small companies. Almost all sectors are covered too. The only sectors which are not eligible for Enterprise Finance Guarantee funding are coal, forestry, fisheries, transport and agriculture. However your application may be rejected if you want aid for export, you use Enterprise Finance Guarantee funding abroad, or your business makes preferential use of domestic over imported goods.
The government did launch an Export Enterprise Finance Guarantee (ExEFG), but withdrew it in June 2012 due to its desire to simplify the export finance support it provides. If you wish to secure government-backed support to sell overseas, UK Export Finance provides a number of products and services, including the Export Working Capital scheme.
The decision on whether or not to grant a loan using this scheme is wholly delegated to the bank, or finance house which receives the application; the British Business Bank does not have a say. The lender will first assess the application using its standard commercial criteria, before switching to the Enterprise Finance Guarantee criteria if it cannot justify the loan using its normal considerations. If you are unsuccessful, there is an appeals process, based on a set of principles agreed by all of the participating lenders.
How do I apply for an Enterprise Finance Guarantee loan?
Like any loan application, an Enterprise Finance Guarantee loan requires you to fill out an application and provide a raft of supporting documents, including a business plan, management accounts and financial projections.
You can find more information on the Enterprise Finance Guarantee scheme on the British Business Bank website website.