Or EFG as it is more commonly known. The Enterprise Finance Guarantee was launched in 2009 as the UK sank into the depths of the credit crunch. The Enterprise Finance Guarantee (EFG) was a replacement for the Small Firms Loan Guarantee Scheme (SFLGS) which operated for several years previously.
Great, But What Is Enterprise Finance Guarantee?
The scheme was set up by the government to encourage lending to SMEs, mainly through commercial finance provided by the then big four banks.
The idea was that it would encourage the big four banks to lend to businesses where they would typically so no due to a lack of trading record of collateral security.
The EFG scheme worked by the government guaranteeing 75% of the loan amount in return for a 2% per annum premium paid based on the outstanding balance of the business loan.
Has The Enterprise Finance Guarantee Worked?
Mute point. The answer is that it probably did, but like most things it has had it’s day. The real issue was always going to be what happened when both the government and the banks started to see losses through the scheme.
The reaction is pretty much as you would expect, use of the EFG scheme stalled, the government wanted more assurances on how lending through the scheme was managed, and as such the brakes went on EFG loans.
The EFG was working, these stats seem to prove this;
- At December 2013 £2.45bn was lent via Enterprise Finance Guarantee loans
- 23,748 loans had been made of which 20,469 had been drawn down
- 20% (by value) of EFG loans were to businesses under 2 years old
What Next For Enterprise Finance Guarantee?
We think there could be a few changes coming through for the scheme. The formation of the British Business Bank will mean there needs to be some changes to ease the flow of business finance.
To ease the flow of business finance we need to see more comfort for lenders, or more diversity of lenders. We prefer the second option as competition is always the driver of more business volume, regardless of sector and finance is no different.
Our view is shared by Hayley Conboy, Head of Enterprise at CBI;
“The Business Bank has a major role to play in boosting the confidence of SMEs that a long-term back-stop is in place to provide support. It should also focus on tackling SMEs over-reliance on traditional sources of debt by boosting alternative finance.”
Totally agree. Enterprise Finance Guarantee has done well but the future for commercial finance is in alternative business finance, new lenders, innovation and drive. To get lending to SMEs moving then it will be the alternative lenders that drive momentum, the banks may well fall behind…
By Dave Farmer
Ref – Financial World Magazine, Feb 2014