Following on from our recent article on the new Business Bank, this is the first in a series explaining the various government funding schemes available to businesses in the UK.
The Enterprise Finance Guarantee (EFG)
The Enterprise Finance Guarantee (EFG) is a loan guarantee scheme to facilitate lending to viable businesses that have been turned down for a normal commercial loan due to a lack of security or a proven track record. In instances such as this, EFG may be an option, but will only be considered when the lender is satisfied your business can afford the loan repayments. This will have been determined by the lender during the original loan application.
The delivery of EFG, including all lending decisions is fully delegated to the lender. They will decide whether EFG is appropriate and confirm whether your business is eligible, but businesses are encouraged to ask about EFG.
While the government provides a guarantee to the lender, they have no role in the decision making process.
Eligibility criteria
Eligibility for EFG will be determined by the lender.
The following is a guideline only. EFG is open to viable businesses that:
- operate in the UK
- have a turnover of less than £41 million
- are seeking finance between £1,000 and £1million
- want repayment terms from 3 months to 10 years (less for overdraft and invoice finance facilities)
- operate in a sector that is eligible for EFG (most sectors are eligible)
EFG is subject to certain sector restrictions arising from the EU de minimis State Aid rules under which it operates. A list of the main sector restrictions is provided here.
Types of facilities available
The following facilities are available under EFG, repayable over a period of 3 months to 10 years unless otherwise stated:
1) New term loans
Unsecured and partially secured, for working capital or investment purposes including R&D.
2) Refinancing of existing term loans
Where the loan is at risk due to deteriorating value of security or where for cash flow reasons the borrower is struggling to meet existing loan repayments.
3) Overdraft conversion
Conversion of part of or all an existing utilised overdraft onto a term loan in order to release capacity in the overdraft to meet working capital requirements.
4) Invoice finance guarantee
Providing a guarantee on invoice finance facilities to support an agreed additional advance on a SMEs debtor book, to supplement the invoice finance facility on commercial terms already in place (available for terms up to three years).
5) Overdraft guarantee
Providing a guarantee on new or increased overdraft borrowing where the SME is viable but has inadequate security to meet a lender’s normal requirements for the level of overdraft requested (available for terms up to two years).
Please note that participating lenders are under no obligation to offer the full range of products.
List of lenders and application process
Businesses seeking debt finance can approach one or more of the participating lenders shown here.
EFG loans typically require the same information that banks need to process a commercial loan application. Participating lenders will advise you of their specific requirements. Failure to provide the required information may delay the loan decision or lead to a loan decline.
Lenders will typically assess loan applications against their standard lending criteria to determine whether they wish to lend. Where the lender determines the business is viable (able to meet the monthly loan repayments and repay the loan in full) but is lacking adequate security to meet the lenders normal lending requirements, they can consider providing a loan under EFG. The government plays no role in the loan decision process.
Once the lender has determined that use of EFG is likely to be appropriate, they confirm eligibility and record details of the borrower and their facility via a secure web portal.
Businesses that do not meet the lender’s viability requirements are not suitable for EFG. EFG is intended to support lending to businesses which can ultimately repay their loan in full, not prop up unviable businesses.
The government guarantee
By providing lenders with a government-backed guarantee for 75% of the value of each individual loan, subject to a cap set by an Annual Claim Limit, EFG facilitates lending that would otherwise not take place.
The guarantee provides protection to the lender in the event of default by the borrower – it is not insurance for the borrower in the event of their inability to repay the loan.
The borrower is responsible for repayment of 100% of the EFG facility, not just the 25% outside the coverage of the government guarantee. Where defaults occur, the lender is obliged to follow their standard commercial recovery procedure, including the realisation of security, before they can make a claim against the government guarantee.
In addition to the costs and fees charged by the lender, businesses supported under EFG are required to pay an additional 2% annual premium which partially covers the cost of providing the guarantee. The premium is assessed and collected quarterly in advance throughout the life of the loan based on the outstanding capital balance of the loan (for invoice finance and overdraft guarantees the premium is assessed on the agreed facility limit). The borrower is provided with a premium schedule by the lender as part of their loan documentation and collection is made by Direct Debit under the description “BIS LOAN GUARANTEE”. The interest rate charged and any other fees and charges applied to the loan are a commercial matter for the lender.
Security and personal guarantees
Under EFG, lenders are entitled to take security, including personal guarantees. This is standard commercial practice and an established mechanism for ensuring a degree of personal commitment to repayment of the loan by the business. In EFG this means there is a three-way risk sharing between borrower, lender and the government.
When taking security, lenders are required to apply their normal commercial policies in determining the extent and value of security available. The exception from normal commercial practice is that lenders are expressly prohibited from taking a charge over a principal private residence for an EFG facility. A personal guarantee should not be taken or attributed, solely or preferentially to cover the 25% of the EFG loan not covered by the government guarantee. The borrower is liable for repayment of 100% of the loan.
EFG should not be seen by borrowers or their advisers as a mechanism for putting personal assets beyond consideration (principal private residence excluded for the purposes of EFG). If the lender refuses to offer EFG on the basis that the borrower had access to security which they were not prepared to put forward, then the lenders decision would be fully supported by BIS.
Comment
The EFG can be a very useful scheme to help businesses attract finance when there is little or no security that can be pledged. It is our experience that the Banks are semi-reluctant to go down this route for a variety of reasons, not least the additional work involved for what can often be a lesser return! In addition, and in the event of default, the bank is mandated by the Government to seek recovery for 100% from the client first before the guarantee kicks in. This can prove difficult with less security available.
Finding alternative funding
If you have been unsuccessful in your application for an EFG and the continuing lack of availability of funding is affecting your business, please contact us. We are specialists in this field and can hopefully point you in the right direction.
As always, if you have any comments or any of your own experience you would like to share on this subject, please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.
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