Government help? - the Enterprise Finance Guarantee scheme
SOURCE: CHARTERED BANKER, APRIL / MAY 2009
The Government has introduced a number of measures to try and stimulate business activity, mostly by attempting to deal with the lack of capital in the market. One of the measures is to make £1 billion available under the Enterprise Finance Guarantee scheme (“EFG”) which is designed to assist businesses that would otherwise have insufficient assets to offer as security for bank funding.
The EFG is the successor to the Small Firms Loan Guarantee scheme (“SFLG”) and it has a number of advantages over its predecessor. Both schemes effectively provide a government guarantee of 75% to qualifying businesses, but the new “improved” EFG has loosened some of the restrictions that applied to the SFLG to make it more accessible.
The EFG is available to businesses with a turnover of up to £25 million, and covers most business sectors (the main exclusions at present being the agricultural, coal and steel sectors); whereas the SFLG was only available to businesses with a turnover of up to £5.6 million and in more restricted sectors. Also, the EFG provides loans up to £1 million compared to an upper limit of £250,000 for SFLG. Another improvement is that the EFG can be used to convert an overdraft into a loan, and capital repayment holidays of up to 2 years can be negotiated. Also, the loans can extend to a 10 year repayment period.
As with the SFLG, the EFG loans will only be available where the applicant’s plans are viable and would meet the usual commercial requirements for a loan. The bank will have to assess the transaction and security cover, and decide whether the borrower is able to service the loan.
If the proposal is within the parameters of the EFG, and the bank would proceed with the loan if more security was available, the government will provide a guarantee of up to 75% of the amount of the debt.
It is important to note that the EFG is not a mechanism for putting beyond consideration any asset which, according to normal commercial lending criteria, might be considered available as security; and an existing loan may not be refinanced with a new EFG backed loan to enable the existing security to be released.
As you would expect there is a cost to the borrower of the government providing a guarantee, and this will range from 1.5% to 2% of the loan per annum – but this is a reasonable charge to ensure that the transaction does proceed.
The EFG is available until 31 March 2010, and over £1 million per day has already been guaranteed since its launch in January 2009, and demand is expected to increase. It is recommended that the first priority is to assess the business proposal, and if that is considered to be viable, then if there is insufficient security, check to see if the thresholds enable the EFG to apply.
Another initiative which the government has launched in order to help banks continue lending, is the Working Capital Scheme whereby the government is making available to banks guarantees of up to £10 billion, which will support bank lending of up to £20 billion. The intention for this facility is to provide capital which banks can distribute in order to increase all types of lending to businesses with a turnover of less than £500 million. This should help to stimulate the market, and the flow of money, which in turn shall benefit all businesses.
These initiatives are positive, but will only work to fund viable businesses – they are not a means of shoring up toxic debts – and their impact will depend on responsible lending and realistic borrowers.
author: alex innes