How does the Small Firms Loan Guarantee Scheme work?

For small businesses that need capital to get started or grow, there is a government-backed scheme to make it easier to borrow money.

The Small Firms Loan Guarantee Scheme is particularly useful for businesses that have been turned down for loans elsewhere, because they don’t have enough assets to secure the loan.

It’s backed by the snappily-titled Department for Business, Enterprise & Regulatory Reform, which replaced the DTI.

You borrow from one of a number of approved lenders (see the up-to-date list here).

The government guarantees 75 per cent of the loan amount. That will cost you a two per cent premium on the outstanding balance of the loan.

You can borrow between £5,000 and £250,000 for up to 10 years.

But your business must turnover less than £5.6 million, and be under five years old.

That date is generally calculated from the time your business started paying Corporation Tax, or Class 2 National Insurance contributions if you are self-employed. There is more guidance on the government’s definition of your business’s age here

The scheme is a huge help for growing small businesses, but still comes with the usual warnings.

Some banks may be reluctant to lend on the scheme until they have exhausted their other lending options, including overdrafts, mortgages and even invoice factoring.

You will still need to put up some security for the 25% of the loan that isn’t guaranteed by the government. If your business doesn’t have appropriate assets, that could include your home, which will then be at risk if you default on the loan.

The lending bank will also carry out a credit check on you and your business.

The general advice from experts is to try and project your cash flow for the term of the loan, and not to apply for more money than you think your business can comfortably repay.

Further Reading

Small Firms Loan Guarantee Scheme - Advice & Application Guide

Remember to get professional advice from a qualified accountant before taking any action. Don’t rely purely on information contained in this article.