The Enterprise Finance Guarantee (EFG) scheme is designed to help small businesses raise the funds they require to trade through the recession. However the availability of finance through the scheme is not guaranteed.
- What is the Enterprise Finance Guaranatee?
- Does the scheme work?
- Alternative options for raising company finance
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What is the Enterprise Finance Guarantee?
The Enterprise Finance Guarantee is a UK Government scheme introduced on the 14th January 2009. It replaced the Small Firms Loan Guarantee Scheme.
The scheme is designed to encourage banks to lend to small and medium sized businesses. Up to 75% of any loan granted through the scheme is guaranteed by the Government. The company directors then personally guarantee the remaining 25%.
The idea is that banks are given confidence to lend because they know their money will be repaid.
The scheme does not mean that a company will always be able to borrow the money it wants. The banks must still carry out due diligence and can decline loans if they believe the risk is too great.
Does the Enterprise Finance Guarantee Work?
There are major criticisms of the Enterprise Finance Guarantee scheme. The problem is that loans have not been made available to companies at the rate that was hoped. It is seemingly common place that loan applications are declined with little or no rational explanation from the lender. This is despite being backed by solid business plans.
Of course it is not sensible for any bank to lend to a business which is not viable. In the current turbulent economic times this is understandable. Banks are very concerned as to whether business plans and cash flow forecasts are realistic.
The Enterprise Finance Guarantee recognised banks lending concerns and was meant to overcome fears of non repayment.
However based on the Governments figures the targets for lending are not being met. It seems that the banking system is only willing to lend in cases where success can be guaranteed. The problem is these are generally few and far between.
Alternatives to the Enterprise Finance Guarantee
Borrowing via the Enterprise Finance Guarantee may have been turned down or may not be appealing to Directors. In these circumstances there are alternative options for raising finance that can be considered.
One of these is Asset Refinancing. This process allows a company to borrow against the value of the fixed assets it owns. Generally speaking this option is suitable if the company has valuable machinery or equipment. Up to 70% of the value of the equipment could be realised using this solution.
An different solution is Invoice Factoring. Using factoring a company can borrow money against the value of its outstanding invoices. The benefit of this is that cash is made available to the company immediately. It does not have to wait until the invoice is paid.
Invoice financing could allow a company to draw down up to 80% of the invoice value immediately on the issue of a valid invoice.