The Enterprise Finance Guarantee Scheme
This business lending scheme has been around for several years, it has seen a few different incarnations but remains the Government’s main lending support vehicle for businesses wanting to borrow from the banks.
In essence the Enterprise Finance Guarantee (EFG) is there to step in and provide the lender with a guarantee where the business’s proposal is good and the only thing missing is tangible security (typically property). The theory is that if the lender’s risk is reduced then they will more readily lend.
The EFG scheme provides the lender with a guarantee of 75% of the outstanding balance, meaning that the most the lender could lose would be 25% of whatever they lent.
However… If the above were completely true then why are more businesses not borrowing through this scheme? After all, you can refinance existing borrowing, the term of the loan can be varied as can the repayment structure. So why is it not being used more?
The Lesser Known EFG Facts
- The guarantee is between the Government and the lender, it does not protect the borrower who remains liable for the full amount of the borrowing even though they pay the 2% premium for the guarantee
- The Government will not pay up on any claim made by the lender just because they asked. The Government will ask to see the justification used to lend, check that everything was done correctly and that the scheme was used correctly
- There is a ceiling to the volume of claims any lender can make, once this ceiling is reached then the Government can decline to pay out on future claims
- Lending is judgemental. Sometimes it can be as easy to argue the strengths of a case as it can to argue the weaknesses. If a loan goes bad then what may have seemed a justified decision to lend could be viewed differently by a different person. It is rarely ever clear cut
- Historically the default rate on EFG and it’s predecessor incarnations have been higher than other secured loans
- There are direct alternatives to EFG that banks rarely mention
What this means is that even though on paper the lender appears to have a good piece of security, when it comes to enforcing it then it may not be as good as originally thought. Unlike property, which will always be there, the EFG guarantee is subject to review before being paid.
Because historically there was a higher default rate on EFG then lenders are more cautious. This means that it is harder to get an EFG loan sanctioned, it takes more time and this alone can be detrimental to the borrower.
What The Borrower Doesn’t Know About EFG
One of the common stories told by borrowers is the time it takes to get a decision or that the bank have avoided talk of using EFG.
There is an agreement between the Government and the lenders about timescales. The paragraph below is taken from the Government guide to using EFG, it shows the timescales and service levels agreed;
How long will it take to process my EFG loan application? EFG was designed to be a simple add on to the lenders own credit application process. Lenders have confirmed that considerations of the EFG criteria and approval of the loan guarantee should, in the majority of cases, only add on average 2-3 days to the lender’s own processes. This will be dependent on the borrower providing all information required to process the loan application.
I have heard that it takes months to get a decision on an EFG loan application. Is that right? No. The vast majority of EFG loan decisions are made within a few days of the lenders standard processing times. Major lenders have committed to a 20-day processing target for EFG lending, measured from when the lender has received all relevant information from the borrower. The Government monitors this closely.
It is worth showing this to the bank when you apply, or they suggest using EFG. Many bank managers are not aware these timescale agreements exist, so know where you stand and do mention it!
Additional Information
Quite often using the EFG is not the best option for the borrower. There are lenders who will advance loans to businesses up to £250k without needing tangible security. Many of these have 48 hour turnarounds which blow the bank processes out the water. If you are considering using EFG then let me show you the alternatives first, it could save you a lot of time and pain.
If you want to know more about how EFG works, including some helpful FAQs then see the attachments below. These have been taken from the Government EFG website and are attached here to help.
If you want to know more about EFG, the alternatives, or if your application is taking too long and you want someone to hurry it up then please get in touch.
By Dave Farmer