Advice on using the Enterprise Finance Guarantee scheme

Having been first set up in January 2009, the Enterprise Finance Guarantee scheme has now facilitated £2 billion of additional lending. We explain how businesses can apply for loans through the scheme and speak with a company which has utilised the government initiative.

Government funding initiatives are set up to provide businesses which have been unsuccessful in securing finance by other means to access to capital needed to either balance the books or grow.

However, one of the problems with these kind of schemes is first making them commonly known, and then informing businesses as to how to submit applications.

We’ve picked the Enterprise Finance Guarantee (EFG) scheme to have a look. Contained below are vital tips on how to qualify, and what needs to go into an application. First, however, Lawrence Eke, managing director at Phase 5 Technology, explains why he decided to use the EFG scheme and what it has allowed his business to do.

(1) How did you find yourself needing a bank loan?

As an aviation technology company, we rely on securing contracts with major airlines to keep the business running.

Our initial client, bmibaby, was bought by the International Airlines Group in 2012, and the airline as a whole was shut down later that year. This put an end to the project we’d been working with them on, and although we had orders in the pipeline from our next client, another UK airline, we had a time lag between the revenue generated from those orders and the end of the bmibaby contract. This put pressure on us to raise working capital and invest in the next project.

(2) What other avenues had you pursued?

The EFG wasn’t our first step. We had already injected personal capital into the business, looked at peer-to-peer lending options, and applied for a regular bank loan – unfortunately we found the bank unwilling to lend at the time.

We were approached by some outside investors but we were unwilling to give up equity. The ensuing period of uncertainty became a crucial time for the business.

(3) Were you aware of EFG, and if not how did you become exposed to it?

We weren’t aware of EFG at the start of the loan application process. Instead, it was mentioned by our HSBC relationship manager as an option when all other HSBC products were exhausted.

(4) What was the process of applying for a loan through the scheme?

We submitted the application through our HSBC relationship manager, with the requirements much the same as a standard business loan. There was an application form, a personal guarantee form, a personal budgeting spreadsheet and then a business plan and a detailed cash flow forecast for the business to complete.

(5) How quickly did you gain access to the capital you needed?

We started the application process in August and we received the funding in February of the next year.

(6) What did you use the capital for?

The capital met a variety of needs. We used the money to complete some of the orders we had already taken, and also to pay for the running costs of the company between the loss of the first client and our second client income being generated. It was a real lifeline for the business at that time.

(7) How is the repayment set up, is it different from a traditional loan?

The EFG loan repayments come out automatically via direct debit, with the only difference to a normal bank loan being that the money is taken by two beneficiaries rather than one.

(8) What would you do now if you needed access to more cash?

In future, if we were to receive a major order that we could not fund internally I’d certainly look to use EFG again, perhaps alongside peer-to-peer lending options, depending on how quickly we needed access to the capital.

I’d whole heartedly recommend EFG to other companies looking for financing – for Phase 5 Technology, it has proven vital to the long-term success of our business.

How the EFG works

What is it?

The Enterprise Finance Guarantee (EFG) is a government loan guarantee scheme to enable lending to small and medium sized enterprises (SMEs) which can demonstrate sufficient cash-flow to meet lenders loan affordability requirements, but lack adequate security to obtain a commercial bank loan.

Since EFG was launched in January 2009, some 20,000 SMEs have been offered loans, generating more than £2 billion worth of additional lending. There is currently £500 million of funding available.

All of the main high street banks, plus a number of other lending institutions offer EFG loans, which are provided with the support of a government guarantee. The banks provide businesses with funding that they might not otherwise have had access to, and can be used in a variety of ways – from employing and retaining staff to investing in new equipment or work space. It can also be used to help fund day-to-day running costs.

Businesses from almost every sector can apply, and past recipients of EFG funding range from digital design agencies to construction firms and furniture manufacturers.

EFG is principally used to support loans of between £1,000 and £1 million, and repayment terms between three months and ten years. EFG also supports overdrafts and invoice finance facilities, which have shorter repayment terms of two years and three years respectively.

How it works and who can apply?

All EFG loans are provided by the participating lenders using personal funds. The government provides the lender with a 75 per cent guarantee for each loan, but the borrower remains liable for repayment of 100 per cent of the loan.

While EFG loans are available to a wide variety of businesses, the following criteria applies:

  • The business must have an annual turnover of less than £41 million, but there is no limit on the number of employees
  • The business activity being financed must take place in the UK, although the SME itself might be foreign owned or registered abroad
  • The borrower contributes to the cost of the scheme by paying a 2 per cent per annum premium which is in addition to the fees and charges applied by the lender

How do I apply?

A business will always apply for a commercial loan before EFG is considered. If a business meets the lenders’ loan affordability requirements, and would have been offered a traditional bank business loan if they had adequate security, then EFG is worth considering. Businesses should ask about EFG during their loan application. The full list of EFG lenders can be found here.

When does it need to be paid back?

EFG loans have repayment terms between three months and ten years. Lenders follow standard commercial lending practice, meaning the majority of EFG loans will be repaid on a monthly basis. Lenders have the flexibility to offer capital repayment holidays and bullet repayments (where the business pays back the loan in a lump sum at the end of the term) if desired.

What other finance options are available?

If a business is not eligible for the EFG, or a loan application was unsuccessful, there are a range of other finance options available for SMEs.

More on the Enterprise Finance Guarantee scheme:

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for GrowthBusiness.co.uk from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.

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