Details
In his Pre-Budget Report, presented 24 November 2008, the Chancellor announced a Small Business Finance Scheme. This went live as the Enterprise Finance Guarantee on the 14th January 2009.
The government offer to bear 75% of the risk of default on each eligible individual loan, subject to a cap on the total claims that may be made by each participating bank.
EFG has replaced the Small Firms Loans Guarantee (SFLG) Scheme. It has wider criteria, in that it offers guarantees of loans of up to £1 million, rather than £250,000, and is available to businesses with turnover of up to £41m, rather than £5.6m. It provides lesser support to lenders, in that the total amount paid by the Government to each participating bank may not exceed 9.75% of the total amount advanced by that bank on all loans in the period, whereas SFLG contained no such cap. It allows the participating bank to insist, for the first time, on personal guarantees.
The scheme is open to businesses with an annual turnover of up to £41m, seeking loans of £1,000 to £1 million, repayable over a period of 3 months to 10 years. State aid rules restrict or exclude businesses in certain industries such as agriculture, coal and transport.
The scheme is only open to viable businesses with no security or insufficient security.
The purpose of the guarantee is to support new or existing borrowing or converting an existing overdraft into a loan freeing money for working capital. An important point is that the decisions on loans are made by the lenders, not BIS.
The cost of the guarantees to the borrower is 2% per annum of the outstanding balance, collected quarterly, payable to BIS. BIS are offering a discount of 25% (making the cost of guarantees 1.5% per annum) for all premiums successfully collected in 2009.
Under the EFG scheme the UK government, through its Department for Business, Innovation and Skills (BIS) will guarantee 75% of any loans made, with the bank covering the remaining 25%. The guarantees will mean that the government, or taxpayers, will pick up three-quarters of the tab for any bad loans for which a claim can be made.
However, lenders participating in the scheme cannot exceed claiming back more than 13% of the total amount lent under EFG. Therefore, only 9.75% of the total loan portfolio is recoverable (75% of value of loans recoverable until ceiling of 13% is reached = 9.75% total amount recoverable by scheme participants making loans).
The cost to the taxpayer is the 9.75% less the total fees collected from all borrowers.
The Enterprise Finance Guarantee applies to loans, and can also be used to convert existing overdrafts into loans to enable businesses to free up their current overdraft facilities to meet working capital demands.
The EFG is designed primarily as a means of providing working capital to businesses, however loans can also be provided for other purposes such as asset purchase, business expansion or acquisition, or property/equipment purchase.
- Applications will be considered where a business has a viable proposal but may incur difficulty in obtaining conventional finance because of lack of security.
- The EFG is not restricted to established businesses. If a new start-up, with no/little available security, meets usual credit policy criteria and has presented a sound business plan, the Bank may still choose to support an EFG application.
EFG is managed on behalf of the Government by Capital for Enterprise, an arm's length body which is the UK Government's centre of knowledge and expertise in SME finance interventions.
Read more about this topic: Enterprise Finance Guarantee
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