Cyberbore's Blog

Tales from a Venture Capitalist

The Enterprise Finance Guarantee

Posted by cyberbore on 22 September, 2010

For many years the Government has offered to gurantee loans to smaller firms where the loan criteria are sound but the borrower is unable to provide adequate security.

Originally the Small Firms Loan Guarantee Scheme, it was renamed the Enterprise Finance Guarantee Scheme (EFG) and in the 2009 Pre-Budget Report was the welcome announcement that it would be extended through to 2011. It is designed to support established and viable companies looking for additional funding or working capital.

The EFG is aimed at SME’s (small to medium-sized enterprises) with an annual turnover from £500k to £25m, and it guarantees the loan by 75%, subject to certain conditions. It’s designed to support those businesses without the security needed to raise finance and the scheme can be a great way to quickly inject working capital into an enterprise. It can also be used alongside other services, such as Factoring or Confidential Invoice Discounting, to simultaneously improve ongoing cashflow.

For those that have no other means of funding, and insufficient collateral to secure a traditional loan, the financial support of the EFG encourages growth and innovation. For viable, well-run businesses, the scheme offers good availability in terms of loan amount, sector eligibility and loan purpose. However, the EFG scheme has put some barriers in the path to lending, notably the “claim limit” and the general lack of promotion by Government.

Access issues

The EFG will exist until April 5th 2011. And this is a very good thing. The EFG offers wider availability in terms of loan amount, eligibility and purpose than did the SFLG. Pinned to the applicant’s viability and their ability to repay, it is a clear and responsible source of cashflow at a time of continued paucity among lenders.

Claim Limit

From the lenders point of view, there are some pot holes to worry about in the scheme. The scheme’s ‘Claim Limit’ – whereby a lender has a default capped at 9.75% of their lending in any one year – has been widely reported. This means there will be occasions where the lender does not receive the 75% guarantee anticipated at the outset. This has undoubtedly affected lenders’ appetite for lending and will continue to do so. Most lenders also expect the borrower to cover the remaining 25% in some way, such as an insurance premium.

The net result of these considerations is that a EFG loan is a little more expensive than a normal loan.

Reaching its potential

However, there are some important issues to consider. For a start, it has been alleged through the media that some banks have been making it harder to apply for a loan through the scheme. If this is the case, we feel it is unfair.

Not Just High Street Banks

However, there are some surprising participants in the scheme on the lending side.   For example, Venture Finance plc, traditionally just an Invoice Finance supplier.

Their MD, Peter Ewan says “As the first independent invoice financier to offer and fully participate in the scheme, lending to both new and existing clients, we feel it is our responsibility to provide businesses with the kind of supportive funding that promotes future growth. We also believe that the EFG needs even greater publicity in order that small businesses know what could be available. It needs to be properly advertised by both the banks and the Government – something that is presently lacking.”  That’s a healthy and helpful attitude.

Banks who want to become “helpful” should take note…

We accept that there is a balance that needs to be struck between lenders maximising the EFG for viable businesses while protecting taxpayers’ money and ensuring that responsible lending is maintained. However, given the current economic climate we would like to see the Claim Limit increased so the full potential benefit of the EFG can be realised by UK businesses.

For more information visit Business Funding

Monkey Island help smaller businesses find funds for a wide variety of purposes.  We can find both debt funding (loans) and equity investments.  For Invoice Finance we offer a cashback deal, sharing the often substantial commissions available from the lenders.

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