By Mike Smith, Director of Jameson Smith & Co
The Enterprise Finance Guarantee scheme (EFG) brought in by the government in 2008 was deemed as a perfect opportunity for small business owners to secure a bank loan, even if they didn’t have the security for regular loans. However, many small businesses and entrepreneurs have found themselves with serious problems due to the scheme being misrepresented by the banks. Vince Cable last week warned the banks to make sure the Business Innovation and Skills processes were being followed and the EFG principles made clear to potential borrowers.
Over the past four years the EFG has resulted in over £2billion in loans to UK SMEs (about 20,000 loans with an average value of around £100,000). It has been really successful in helping those business owners who have struggled to secure the finance that was needed. However, numerous schemes presented by the banks have been miss-sold due to their complex nature.
The EFG has been sold as a loan where the government will cover 75% if the business fails; leaving the borrower only needing to pay back the other 25%. What the banks do not state is that the borrower is actually liable for the full 100% of the loan; not just the 25% originally thought.
The government’s EFG website page does state clearly that the intention of the scheme is to protect the bank and get them lending again which will in-turn help the borrower. However, in many cases I have seen this was not made clear when the scheme was presented.
When the loan is taken out, there is a 2% premium which is presented as an insurance to protect the borrower’s loan. So when businesses start to face financial troubles, as long as they are paying this premium then it’s assumed they are still covered by that 75% guarantee from the government. In fact the 2% premium is just the cost of the scheme and goes straight to The Department of Business Innovation & Skills.
The government expects the bank to rigorously pursue the borrower to retrieve 100% of the loan. The government is only going to step in once the bank has proven they cannot recover anything else from the borrower.
The silver-lining of this scheme is the fact that the family home is excluded from the personal guarantee. But, this would not stop the bank from forcing clients into unnecessary payment arrangements with personal creditors for example like an individual voluntary arrangement (IVA). The IVA is an alternative way for individuals to avoid bankruptcy. But, if the IVA fails, then the family home can be at risk, overriding the protection from the EFG.
If you already have the EFG finances or are being persuaded by your bank to sign up for the loan it is important to read the small print and understand what can happen if things go wrong and your business fails.
If your company is in difficulty and you are thinking about liquidating and you find that the EFG does not cover what you were expecting then it is not too late to seek specialist help. The average accountant or lawyer will not always be equipped to provide the correct advice to manage the practicalities of the EFG. If you decide to go down this route then check if they have been involved with similar cases before. Generally it is a great scheme to help small businesses and entrepreneurs gain the finance needed. However, it is important to understand the fine details of the scheme and to remember that the government is not going to be there to bail you out.