The Enterprise Finance Guarantee (EFG) is run by the government’s British Business Bank. It encourages lenders to finance small businesses who present a robust business plan but lack security. The scheme underwrites loans to provide a guarantee in the absence of collateral.
The detail behind the EFG
Working with over 40 lenders, the government will guarantee over £2 billion of new bank lending to viable businesses;
- They will underwrite 75% of a loan
- Loans range in size from £1,000 to £1.2m
- Repayment periods are from 3 months to 10 years
- The contract is between you and your bank, the government is not party
EFG loans are high risk for the banks as they could lose up to 25% of the loan value. There is an expectation that company directors will have already utilised all of their personal assets as security before an EFG loan can be secured.
Once the bank has agreed to finance you, they will apply for the EFG on your behalf.
The cost to small businesses
- Bank charges are between 2.5% and 4.5% above base rate, depending on the perceived risk involved
- An arrangement fee of 1%-2% is often charged in addition
- The government then charges 2% for provision of the guarantee
The charges are high because you pay a premium for the guarantee. But it could be your saviour, and still more cost-effective than releasing an equity stake in your business.
And if you fail to repay the loan in full, your business remains liable for the full debt. The government guarantee is for the banks only.
Eligibility is devolved to the lender as part of their standard commercial lending criteria.
As a guidance, EFG is available to viable businesses that:
- Operate in the UK
- Have a turnover not in excess of £41 million
- Are in a position to meet the repayments over the fixed period
- Have a robust business plan in place
- Require the finance for an eligible purpose, such as growth
- Operate in a business sector that is eligible for EFG
The main exclusions relate to businesses in the agriculture, coal and steel sectors and to the financing of individual export orders.
Start-up businesses are not excluded from EFG loans but may find it more difficult to obtain one due to the perceived instability of the business.
In making their lending decision, banks will scrutinise your sales and marketing strategy to ensure your marketing plan will deliver against your sales forecast. They will also look at your leadership team to validate its level of management expertise and industry knowledge.
In simple terms, your business plan and projected financial model must be robust.