The Government launched the EFG scheme to encourage lenders to provide further funding to smaller businesses following the credit crisis. In this article, we look at the how the scheme operates in practice, and how small firms can benefit.
The EFG scheme was launched in January 2009. Under the terms of the scheme, the Government underwrites 75% of all qualifying loans provided by commercial lenders to ‘viable’ SMEs.
Borrowers are responsible for paying back 100% of the loan over a period of up to 10 years, plus a 2% premium towards the cost of providing the Government guarantee.
According to the most recent data (March 2013), 19,700 small firms have received a total of £2bn in funding via the EFG scheme since its implementation.
Who can apply for a loan?
- The EFG scheme is open to UK-based businesses looking for a loan of between £1,000 and £1m.
- Eligibility is determined using standard commercial lending criteria.
- The scheme was initially open to businesses with a turnover of up to £25m, although this was subsequently increased to £41m.
- In the event that a business defaults on their loan repayments, they will be subject to standard commercial debt recovery procedures.
What type of loan facilities are available?
Under the Enterprise Finance Guarantee scheme, participating lenders can provide a variety of loan facilities, including:
- Standard loans (unsecured and partially secured).
- Refinancing existing loans.
- Converting an existing overdraft into a term loan.
- Invoice finance guarantee (for terms of up to three years).
- Overdraft guarantee (where a ‘viable’ SME does not have the security to secure the desired overdraft level).
The EFG application process
If you want to apply for lending via the EFG scheme, you should approach a participating lender.
The application process is the same as it would be for a non-Government backed loan, and lending is only made available to terms deemed ‘viable’ and able to repay their loans in full.
Under the terms of the Government guarantee, lenders are protected in the event of a loan default, although all three parties share the risk. Business owners may have to provide personal guarantees to lenders to cover the 25% of the loan value not backed by the EFT scheme, but significantly, no charges can be made over a borrower’s principal private residence.
How successful has the scheme been?
Despite getting off to a strong start (lending reached £255m in Q2 of 2009, and £218m the following quarter), the total amount of loans advanced has fallen in subsequent quarters, reaching a low of £70.7m in the final quarter of 2012, according to Syscap.
Additionally, the average interest rate payable on small business loans of under £1m has climbed to 4.22% in 2013. This is the highest level since the end of 2008, suggesting that small firms are still struggling to access funding at reasonable levels of interest.
Visit this page of Gov.uk, for more details of the EFG scheme, including how to make an application and a list of participating lenders.