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.
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, the loan scheme provides a government guarantee to boost the credibility of small business loan applications. Since its launch, the scheme has offered a total value of £1.88bn to over 18,000 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 account for 37% of all loans offered, with 17% attributed to businesses within their first three months.
Despite the government's best intentions, the scheme has recently seen a steep decline in lending. The number of loans offered in the second quarter of 2012 fell to just 748, (a total loan value of £86m) compared to 2,376 (a total loan value of £255m) in the same quarter in 2010.
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:
In addition to the standard capital and interest payments demanded by the lender, Enterprise Finance Guarantee loan recipients have to pay a premium to the Department for Business, Innovation and Skills (BIS); 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 2015.
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 government 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.
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 Department of Business, Innovation and Skills (BIS) website.