Enterprise Finance Guarantee - Comparison With Its Predecessor, The Small Firms Loan Guarantee Scheme, SFLG

Comparison With Its Predecessor, The Small Firms Loan Guarantee Scheme, SFLG

The objectives of SFLG are summarised in the 2004 Graham Report, which carried out a wide-ranging review of the scheme:

• "The aim of SFLG is to assist viable, debt-appropriate businesses that lack sufficient collateral to access loan finance in the market. In line with other interventions, SFLG should be used only in circumstances of market failure, where a viable business is unable to raise finance under conventional terms. SFLG forms part of the Government’s portfolio of interventions in the debt and equity markets, and, as such, it is designed to support the Government’s objectives."

The Small Firm Loan Guarantee scheme went through various small changes during its life, from 1981 to 13 January 2009:

• Refer to the 2008/9 annual report on SFLG for a summary of the main structural and eligibility changes in each year.

The scheme has consistently been focused on new start up and early stage businesses.

• From December 2006 to January 2008 the scheme was only available to businesses established less than five years.

The maximum loan under the scheme was £250,000.

For loans written from April 2003 the guarantee rate was 75%.

• Earlier loans had guarantee rate of between 70% and 85%.

• There was no cap on the total of claims that could be submitted by each participating bank.

In its peak years of take-up (1995 and 1996), just over 7,000 loans were guaranteed in each year. The Graham Review saw a general tightening of eligibility criteria.

• In the year to March 2008, 2,619 loans were issued, with £207 million advanced.
• 1,100 of those loans were for amounts of less than or equal to £50,000, and a further 908 loans were for amounts of between £50,001 and £100,000.

• In the period April 2008 to January 2009, £178 million was advanced under the scheme, which represented 49% of the £360m limits allocated to all the participating banks.

The default rate on SFLG loans has been consistently high:

• The 2004 Graham Report quotes an average default rate of 30 to 35%, equating to bad debt losses after capital repayments and any recoveries of around 20%.
• The peak default rate was seen for loans written in 1989/ 1990, when the default rate exceeded 50%.
• The post-Graham loans, those loans written from December 2005 onwards, were envisaged to have a better default rate than earlier loans. But by August 2009 already 21% of all loans written since December 2005 had defaulted - similar to the experience of preGraham tranches.

In the year 2008/9 the total amount paid out by the Government to banks under the guarantees was £84.6m.