Grants, Efg Scheme And Business Loan Support

GRANTS, EFG SCHEME AND
BUSINESS LOAN SUPPORT

Enterprise Finance Guarantee scheme explained

What is it and how can it help you secure a business bank loan?

The worldwide financial downturn of 2008 had a profound impact on banks, particularly affecting small businesses seeking loans. In the aftermath of the global economic crisis, obtaining necessary financing became significantly challenging for many small enterprises. Despite various government initiatives aimed at encouraging banks to lend, numerous small firms have struggled to secure the financial support they require.

What is the Enterprise Finance Guarantee scheme?

The Enterprise Finance Guarantee scheme (EFG) stands out as a significant initiative, representing a revamped version of the former Small Firms Loan Guarantee scheme. Launched in January 2009 and currently administered by the British Business Bank, this loan scheme aims to enhance the credibility of small business loan applications by providing a government guarantee. Since its inception, the EFG scheme has contributed a total value of £2.63 billion to support over 25,000 economically viable small businesses.

While established small and mid-sized companies have been the primary beneficiaries, start-ups in their initial three years of operation have secured 37% of all loans, with 17% allocated to businesses in their first three months.

Notably, there has been a recent decline in lending through the scheme. Improved credit conditions have led to some banks offering loans without the need for the EFG guarantee, a shift from the conditions during the credit crunch. Despite this trend, businesses drew down approximately £56 million in loans in the quarter ending December 2015.

How the Enterprise Finance Guarantee scheme works

The Enterprise Finance Guarantee (EFG) loan operates like a conventional lending arrangement, where the funds come from the bank or, under the expanded scheme, a community development institution. However, the government provides a 75% underwriting for the loan, offering the opportunity to secure a business loan even without sufficient collateral.

Loans within the EFG scheme range from £1,000 to £1 million, with a flexible repayment period spanning three months to 10 years. Borrowers can opt for a lump sum or periodic disbursements to align with their business strategy.

The versatility of the scheme caters to various financial needs, including:

1. New term loans: Unsecured or partially secured loans used for working capital or investment in projects like research and development (R&D)

2. Refinancing existing loans: Helpful for businesses facing cashflow constraints or dealing with a loan at risk due to declining collateral value.

3. Converting overdrafts into term loans: Offers a way to release capacity in the overdraft to address working capital needs.

4. Invoice finance guarantee: Businesses utilizing invoice finance facilities can use the scheme to guarantee additional debtor book advances for up to three years.

5. Overdraft guarantee: Provides a guarantee for new or existing overdraft facilities, particularly beneficial for viable companies lacking sufficient security. These guarantees are available for terms of up to two years.

In addition to regular capital and interest payments, EFG loan recipients are required to pay a quarterly premium, typically equivalent to 2% per annum on the outstanding balance.

To address the decline in lending, the EFG scheme has broadened its scope. Originally limited to a select list of pre-approved banks, it now includes a larger number of banks and extends to small community development finance institutions. The government has also extended the availability of EFG loans until 2017.

How the Enterprise Finance Guarantee scheme works

The program is accessible to businesses with an annual turnover of up to £41 million, providing ample opportunities for startups and small companies in their early stages. Virtually all sectors are included, with the exception of coal, forestry, fisheries, transport, and agriculture, which are ineligible for Enterprise Finance Guarantee funding. It’s worth noting that applications may be declined if seeking aid for export, utilizing Enterprise Finance Guarantee funding internationally, or exhibiting a preference for domestic goods over imported ones.

Although the government introduced an Export Enterprise Finance Guarantee (ExEFG), it was withdrawn in June 2012 as part of an effort to streamline export finance support. For businesses seeking government-backed assistance in international sales, UK Export Finance offers various products and services, including the Export Working Capital scheme.

The decision to approve or deny a loan through this scheme rests entirely with the bank or finance house handling the application; the British Business Bank does not have a role in this decision-making process. The lender will initially evaluate the application based on its standard commercial criteria. If the loan cannot be justified using standard considerations, the lender will then apply the Enterprise Finance Guarantee criteria. In the event of an unsuccessful application, an appeals process is available, guided by principles agreed upon by all participating lenders.

How do I apply for an Enterprise Finance Guarantee loan?

Similar to any loan application, securing an Enterprise Finance Guarantee loan involves completing an application form and submitting various supporting documents. These documents typically include a comprehensive business plan, management accounts, and financial projections.