Will Battrick

The Enterprise Finance Guarantee (EFG) is an interim government-guaranteed lending scheme intended to help smaller businesses, currently struggling to secure finance, by facilitating bank loans of between £1,000 and £1 million.

The scheme aims to help credit-worthy companies which might otherwise not be able to access the finance they need for working capital or investment finance due to the current tight lending conditions. With the banks reluctant to extend loans in the current financial climate, the government has announced the launch of the Enterprise Finance Guarantee Scheme (EFG), as part of an effort to stimulate bank lending to businesses.

In total, the Enterprise Finance Guarantee Scheme will see the Government provide £1 billion of guarantees to support to £1.3 billion of bank lending.

enable banks to continue or resume lending to viable businesses with temporary cashflow difficulties.

Details

In his Pre-Budget Report, presented 24 November 2008, the Chancellor announced a £1bn Small Business Finance Scheme. This went live as the Enterprise Finance Guarantee on the 14th January 2009.

This 75% guarantee for loans will support bank lending, of 3 months to 10 year maturity, to businesses with a turnover of up to £25million who are currently not easily able to access the finance they need. This will enable them to secure loans of between £1,000 and £1m through the government guarantee, available up to 31 March 2010.

It has effectively replaced the Small Firms Loans Guarantee (SFLG) Scheme. It has wider criteria, in that it offers guarantees of loans of £1 million, rather than £250,000, and is available to businesses with higher turnovers.

The scheme is open to businesses with an annual turnover of up to £25m, seeking loans of £1,000 to £1 million, repayable over a period of 3 months to 10 years. Most businesses will be eligible, but state aid rules restrict or exclude businesses in certain industries such as agriculture, coal and transport.

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. The loan is available through 23 lenders and decisions on loans are made by the lenders.

The cost of the guarantees is 2% per annum, collected quarterly. BERR are offering a discount of 25% (making the cost of guarantees 1.5% per annum) for all premiums successfully collected in 2009.

Each lender is able to advise whether or not a specific business would be affected by these restrictions.

The Government bear 75 per cent. of the risk of default, but the decisions on individual applications under the scheme are taken by the banks involved.

Under the EFG scheme the UK government, through its Department for Business, Enterprise and Regulatory Reform (DBERR) 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 the tab for any bad loans.

• The Enterprise Finance Guarantee will apply 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.

Main Principles

BERR requires that before sanctioning any facilities under EFG the Bank has confirmed the following:

• the applicant’s plans are viable and would meet our usual commercial requirements for a loan.
• the Bank would wish to lend to the applicant and that all the applicant’s available collateral has been exhausted.
• EFG loans may be used to refinance existing overdraft borrowing (the current utilisation not the limit). The Bank must however be prepared to continue to make available an appropriate working capital facility following the refinance; it is not permissible to use EFG finance to simply term existing overdraft debt and not provide working capital finance.

Eligibility

• Businesses of any age may apply for EFG.
• There is no maximum number of employees.
• The applicant’s turnover during the previous 12 months must not exceed £25m. Where an applicant is part of a corporate group (whether a parent, subsidiary or holding company), the £25m figure relates to the entire group.
• There are few sectoral restrictions although an eligibility check should be undertaken in the event of a customer operating in any of the following sectors or in any other instances in the event of doubt:-
  • Fishing
  • Agriculture
  • Shipping
  • Forestry
  • Performing Arts
  • Education
  • Healthcare
  • Social Care Services
  • Coal and Steel

Purpose of Facility

• EFG loans may only be used for business purposes, principally to provide working capital, or to fund expansion or capital expenditure in the UK. Other purposes such as acquisition/purchase of businesses, land/property purchase, and start-up costs are also permitted.

• EFG loans may be used to refinance existing overdraft facilities afforded by the Bank. The Bank must however continue to provide an appropriate working capital facility (i.e. continue to make available an overdraft) should existing borrowing be refinanced and the customer still wishes an overdraft. The level of any continuing overdraft is to be determined by the Bank in that it does not necessarily require to equal the amount of the overdraft which is being refinanced by EFG.

• EFG loans can be used to fund share purchases in respect of business acquisition transactions, subject to the Bank being satisfied that structuring the purchase in such a manner is appropriate.

• EFG loans are available to businesses which export but may not be used to finance large individual transactions which would be more suited to Trade Finance facilities.

• EFG finance may be used to refinance any loan facilities (apart from an SFLGS loan) where the Bank are facing such a large security shortfall that we have made a decision to call up the loan. Such instances will, however, be extremely rare. However in a non-distress scenario, EFG finance cannot be used to refinance loans which we have afforded or loans which have been afforded by other lenders.

EFG Parameters

Borrowing Amount

• The minimum loan amount is £1,000 (£26,000 for Fixed Rate Loans).
• The maximum loan amount is £1m.
• The loan amount must be in multiples of £500.
• Any loans previously provided under SFLGS, even if still outstanding, do not count towards the £1m EFG limit.
• There is no restriction on the number of EFG facilities a customer may have so long as the aggregate of these facilities (based on the original amount granted, not the current outstanding balance) does not exceed £1m.

• Where more than one business wishes to apply for an EFG, each separate business may qualify for an aggregate amount of up to £1m, provided that the applicant is not part of a corporate group and each separate business meets the eligibility criteria.

• Where an applicant is part of a corporate group (whether a parent, subsidiary or holding company), the maximum figure available to the entire group is £1m.

Term

• The minimum term is 3 months.
• The maximum term is 10 years (including any capital repayment holiday).

Drawdown

• Tranche drawdowns are permitted, subject to a maximum of four tranches. If the loan is to be drawn in tranches, no capital repayments are to be made until the loan is fully drawn, which must be within 1 year of the date of the EFG loan agreement.

• The first tranche must be drawn no later than 6 months after the date of the EFG loan agreement. Failure to draw the loan within this period will necessitate the submission of a new application.

Capital Repayment Holidays

• Capital Repayment Holidays, in multiples of 3 months, are permitted up to a maximum of 3 years.
• Subsequent Capital Repayment Holidays may be sanctioned after initial drawdown.

Repayments

• EFG loans must be repaid on a capital only (straight line) basis with interest being debited quarterly to a separate account held at the same branch as the loan account.
• Capital and interest loans (actuarial) or interest only (bullet) repayment loans are not permissible.
• Loan repayments may be monthly or quarterly.

Security

General

• Before offering a borrower an EFG facility, the Bank must be satisfied that it would have offered conventional finance but for the lack of security.

Pledging of Personal Assets

• The Bank must be satisfied that all available personal assets have been pledged for conventional facilities, before considering lending under EFG.

• It is the Bank’s decision as to whether or not personal assets may be considered available as security for conventional lending.

• The Bank must be satisfied that the applicant is personally committed to the venture, and is not using EFG as a means of avoiding pledging personal assets.

• In the event that conventionally chargeable assets are jointly owned with a spouse or third party who is not directly connected to the business any refusal by that spouse/third party to charge those assets is sufficient to render these assets as not being available for conventional lending. For our purposes, a direct connection with the business is defined as partner, director or shareholder with 20% or more of the share capital. The same principle applies where an occupier of a conventionally chargeable asset refuses to grant consent to a charge.

• If the applicant is not prepared to allow all their available personal assets to be used to secure conventional lending, this renders them ineligible for EFG.
• In exceptional circumstances, personal guarantees may be taken in respect of EFG loans.
• The Bank is not permitted to take a charge over guarantors’ principal residences in support of personal guarantees.

Pledging of business assets

• Applicants should be asked to pledge premises, machinery and other assets used in the business as security for the EFG loan, usually in the form of a fixed or floating charge.

• Where the assets to be pledged include property with any element of residential use (eg. shop with flat above) consideration must be given as to whether or not the borrowing will be MCOB regulated. If the borrowing would be MCOB regulated, these assets must be pledged to secure conventional facilities only as it is not possible for EFG loans to be MCOB regulated.

Guarantee Premium

• A guarantee premium is payable to the Government to the value of 2% per annum on the reducing balance of the loan.
• Premiums will be reduced to 1.5% (i.e. a 25% discount) will be applied to premiums due and collected in 2009. This will be managed centrally by the Government’s collection agents; there is no requirement for the Bank to amend premium schedules.
• All premiums are paid quarterly by Direct Debit. Premiums must be paid from a RBS / NatWest account to aid identification of the loan in the event a payment is missed.
• It is essential that the direct debit in respect of the BERR premium be paid as it falls due for payment.

Unsupported Personal Guarantees

Government Guaranteed Lending

List of Eligible Lenders

The following main lenders will lend to eligible businesses under Enterprise Finance Guarantee:

• Airdrie Savings Bank
• Alliance and Leicester Commercial Bank
• Bank of Baroda
• Bank of Ireland (Northern Ireland)
• Bank of Scotland
• Barclays
• Business Enterprise Fund
• Business Finance Solutions
• Clydesdale/Yorkshire Bank
• The Co-operative Bank
• DSL Business Finance
• GLE oneLondon
• HSBC
• HBOS
• NEL Fund Managers
• Northern Bank (Northern Ireland)
• RBS/Natwest
• State Securities
• South West Investment Group
• Triodos Bank
• UK Steel Enterprises
• Ulster Bank (Northern Ireland)
• Whiteaway Laidlaw Bank
• Venture Finance
• Yorkshire Bank

Comparison with it's predecessor, The Small Firms Loan Guarantee Scheme, SFLGS

Over the period from inception (June 1981) to March 2008, 108,218 guarantees have been issued under the SFLG, worth £5,019,336 million. In the year to March 2008, 2,542 guarantees were made, worth £204,959 million.

Progress

On 20 February BERR provided an update of the amount lent under the scheme since January with 400 loans worth around £40 million having been offered.

During a House of Commons debate on the 18th March 2009, The Right Honourable Yvette Cooper MP, Chief Secretary to the Treasury announced that the enterprise finance guarantee scheme was in the middle of processing 400 loans, worth over £40 million.

Successor to EFG

The Government will be bringing forward proposals for a scheme post-March 2010 later this year.

References

www.cbpartners.org/images/Minutes-Burnley-Forum/EFG-Scheme.doc

(1) (2) http://www.businesslink.gov.uk/bdotg/action/gsdDetail?r.lc=en&type=GSD&searchQueryId=1021&searchTerm=enterprise+finance+guarantee&page=1&itemId=1081834978&searchId=3&refpage=4 (3) http://www.hsbc.co.uk/1/2/business/finance-borrowing/enterprise-finance-guarantee (4) http://www.lloydstsbbusiness.com/finance/enterprisefinanceguarantee.asp (5) http://bytestart.co.uk/content/finance/funding/Enterprise-Finance-Guarantee-Scheme.shtml (6) http://www.bytestart.co.uk/content/finance/43_1/efp-scheme-progress.shtml