The global economic crisis that shook the banks so fiercely in 2008 was bad news for small business seeking loans. Since the world's economies went into meltdown three 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 initatives has been the Enterprise Finance Guarantee scheme (EFG), which is a essentially a reworking of the old Small Firms Loan Guarantee scheme. By providing a government guarantee to boost the credibility of small business loan applications, the EFG was designed to support up to £1.3bn of new lending to economically viable small businesses that need funding support.
Despite the government's best intentions, the scheme has run into criticism in recent months, and lending has steadily declined. EFG lending by the banks fell from £144m in the third quarter of 2010 to just £99m in the fourth - the lowest figure for any three-month period since the initiative was launched.
In response, ministers have decided to widen the EFG's scope. Under the original terms of the scheme, a government guarantee was only available to an small list of pre-approved list of banks - but, under changes announced last month, a much larger number of banks will be able to receive the guarantee, and the scheme will be extended to small community development finance institutions.
While widening the terms of the scheme, the coalition also hopes to improve the service provided by its core banks; government representatives recently announced plans to introduce a processing target of 20 working days for all major lenders, to give small firms a clear idea of timeframes for their loan applications.
The government has also decided to extend the duration of the scheme - indeed, chancellor George Osborne announced in his 2011 Budget that the EFG will now run until 2014-15. The government hopes to provide up to £2bn in funding through the scheme over the next four years.
How it works
Like any normal lending arrangement, the cash for an EFG 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 at debt finance 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 myriad needs and circumstances. You can get EFG finance for new loans, the refinancing of existing loans, or the conversion of part or all of an existing overdraft into a loan.
In addition to the standard capital and interest payments demanded by the lender, EFG loan recipients have to pay a premium to the Department for Business, Innovation and Skills; this is usually equivalent to 2% per annum on the outstanding balance of the loan, and is assessed collected quarterly, in advance, throughout the loan's lifespan.
Who can apply, and who decides?
The scheme is open to businesses with an annual turnover of no more than £25m, and almost all sectors are covered; the only sectors which aren't eligible for EFG funding are coal, forestry, fisheries, transport and agriculture. However your application may be rejected if you want aid for export, you use EFG funding abroad, or you have a vested interest in the preferential use of domestic over imported goods.
The decision on whether or not to grant an EFG loan 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 EFG criteria if it cannot justify the loan using its normal considerations.
How do I apply?
Like any loan application, an EFG loan requires you to fill out an application and provide a raft of supporting documents, including a business plan, management accounts and financial projections.
For more information on the EFG click here