Enterprise Finance Guarantee - Does it work?

We’ve all heard about the Enterprise Finance Guarantee. In summary, the Department for Business, Innovation and Skills has put aside £1.3billion to fund the Enterprise Finance Guarantee for those small and medium sized business that need to raise additional funding but have inadequate security of their own to provide. The Government guarantees 75 per cent of lenders' exposure on the business loans.

• According to BIS, in October 2009, Venture Finance provide Dams Furniture ltd with Confidential Invoice Discounting and an asset funding package and consequently allowed the business to be turned around ad avoid closure. 
• In September 2009 Bolton based Azurri, a leading IT support and implementation company, received a £100k Enterprise Finance Guarantee loan from Barclays to help the business expand.                            
• And there are hundred of other examples of companies that appear to have been helped by the Enterprise Finance Guarantee.
• My personal experience is slightly tainted. A manager of a major high street bank (that is now effectively under public ownership) told me that their experience of the old SLFG was that on a number of occasions due to certain conditions not being met the guarantee provided by the Government fell away leaving the bank exposed to 100% of the loan. Consequently the bank has to take a view that their exposure may be greater than just the 25%, which impacts their decision to lend. This legacy of the old SFLG continues to flow through EFG.
• Another bank manager of one of the other major high street banks (however this one is not in the public sector) told me that he knew very little about the Enterprise Finance Guarantee.
• The good thing is that since its inception over 4000 companies have taken up a loan under this scheme and this has resulted in over £400m being lent to SME’s. My question is – is this a measure of success or failure given that the fund was aimed at providing support towards £1.3bn of loans? To me it sounds like the banks are failing to embrace this scheme fully and the criteria provided by the Government was too restrictive. Luckily the Government has recognised this and there have been some relaxation in the rules – but perhaps too little too late. Lets wait and see.

 Below are some of the basic rules of EFG:Participating lenders which includes most of the high street banks administer the eligibility criteria and make all their own commercial decisions regarding borrowing. As with all lending you must be able to demonstrate to the bank that the business is commercially viable; that you can service the loan; and that you can repay back the capital of the loan.   From 30 September 2009, two further facilities will be available via banks:

1. A guarantee on invoice finance facilities to support an agreed additional advance on an SME's debtor book. This will supplement the invoice finance facility already in place
2. A guarantee on new or increased overdraft borrowing for the SMEs experiencing short term cash-flow difficulties.

The main features and criteria of the scheme are:

1. A guarantee to the lender covering 75 per cent of the loan amount.
2. Enables bank facilities of between £1k - £1m and with terms of up to a maximum of 10 years
3. Availability to businesses in most sectors and for most business purposes, although there are some restrictions
4. The lender is entitled to seek unsupported personal guarantees but is not permitted to take a direct charge over a principal private residence for a new Enterprise Finance Guarantee loan
5. The borrower pays a premium of 2% pa on the loan payable to BIS.
6. Only available to UK businesses with sales of less than £25m.

For more information on business planning and funding visit www.wisteria.co.uk - For more information on Company Formations visit www.wisteriaformations.co.uk