Is It The End For The Enterprise Finance Guarantee? - Guest Blog

31st July 2014

Is It The End For The Enterprise Finance Guarantee?

The Enterprise Finance Guarantee, or EFG as it is more commonly known, has been a staple method for raising business finance for several years. The big thing with EFG (link to - http://www.limeconsultancy.net/blog/2014/04/22/enterprise-finance-guarantee) was that the Government would provide the lender with a guarantee of 75% of the loan amount.

The idea was that with the addition of a Government guarantee then the lender would be more willing to grant finance facilities. This was supposed to mean that finance cases which were good but lacked security could be approved.

So What Went Wrong?

For a long time not a lot. The forerunner to EFG, The Small Firms Loan Guarantee Scheme (SFLGS) was pretty good, it worked well enough and lenders had confidence that should the loan go bad then their risk was lessened.

However, as business finance became more difficult to obtain then EFG should have been there to support new finance applications, but it just didn’t happen.

Part of this was due to claims made on the Government guarantee. As with any ‘insurance’ when claims rise then criteria tightens and more questions are asked. For lenders this meant that the Government queried lending decisions and whether the EFG scheme was being properly used.

The Mis-Communication of EFG

Over the last few years the Government have continued to promote EFG. At the same time lenders have backed away from using it. This simply generates confusion. The business owner expects EFG to provide them a loan, the lender wants tangible security and not to use EFG.

There is however some justification for lenders not using EFG. The main one being a default rate of 28% (link to - http://www.ft.com/cms/s/0/ee465a20-88f6-11e3-bb5f-00144feab7de.html) in the first 3 years. That rate of default is simply unsustainable. If you add in that for every claim made the approval decision will be reviewed before the Government they pay out, then you have a loan scheme with a massively high default rate and no guarantee that the guarantee is guaranteed. Phew…

What Does This All Mean For Businesses?

The bottom line is not to think of EFG as a primary funding option. If you are considering applying for it then the business plan needs to be solid gold, plus a definite reason why you won’t be one of the 28% who default.

The better option is to look wider than EFG, look at the other funding options (link to - http://www.limeconsultancy.net/blog/2013/11/08/alternative-sme-finance) that exist for your business and apply your time to applying for funding routes that are more fruitful.

By Dave Farmer

Dave Farmer is the founder of Lime Consultancy (link to - http://www.limeconsultancy.net) , an award winning commercial finance advisory based in Sussex.

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