Business financeEFG

EFG – Need a Business Loan but Have Little or no Security

Enterprise Finance Guarantee (EFG)

GREAT RESULTS DON'T JUST HAPPEN!

You Don’t Usually Just Drift into Securing a Business Loan With no Assets or Capital to Invest.

Make sure your EFG application is successful. Firstly, be clear on what it is you want.  Then create a business plan that accomplishes your business goals

and provides returns on any lender's investment.

All these companies have secured EFG successfully.

Successful Examples

  • James Landau, Managing Director at Wastewise BIOWISE (TRADING AS WASTEWISE) , said. “Securing the funding through the British Business Bank’s Enterprise Finance Guarantee Scheme. Has given our business the boost it needed to take us to the next level.

  •  Nicola Price, Managing Director of Bird Stevens Manufacturing, said. “After implementing successful new management solutions, our business was in the fortunate position to progress and to increase sales; unfortunately, the only restricting factor was a lack of accessible finance.”

  •  Solo Building Supplies Managing Director, Andy Dommett said. “The investment has enabled us to grow our team to 31 employees as well as expand our operation.

Read more British Business Bank

When to Use EFG

The Enterprise Finance Guarantee (EFG) scheme is an effective way to obtain the required funding.  Most banks will turn down a viable business. Due to lack of security or no proven track record in business.

  • If a business is viable. The banks can use the EFG to approve loans that would not meet their normal lending criteria.

  • However, it must be pointed out that the final decision to lend lays with  the bank whom will confirm businesses eligibility.

Who Manages the EFG?

Enterprise Finance Guarantee (EFG) is managed by  the British Business Financial Services.

  • EFG the wholly-owned subsidiary of the British Business Bank plc. Remains on the balance sheet of the Department for Business, Innovation, and Skills.

  • Since the government provides a guarantee to the lender, they have no role in the decision-making process.

  • Hence not a party to the loan agreement between the borrowing business and the lender.

How is a Business Eligible?

The lender will determine its appetite to lend based on its normal commercial lending practices. While considering EFG eligibility.

Therefore, the following is for guidance only.

EFG is open to viable businesses that:

  • Operate in the UK

  • Have a turnover of no more than £41 million

  • Seeking finance of between £1,000 and £1.2 million

  • Most of all can afford to repay over a period of between 3 months and 10 years. 

  • Require the finance for an eligible purpose

  • Operate in a business sector that is eligible for EFG

Facilities available include EFG facilities repayment over 3 months - 10 years.

This is subject to participating lender offering:

  • New term loans for working capital or investment purposes, including R&D, in cases where the proposition would otherwise be declined due to the absence of inadequacy of security.

  • Revolving facilities new or increased overdrafts, or other forms of revolving facility borrowing. Where the SME is viable but has inadequate security to meet a lender’s normal requirements for the level of overdraft requested (available for terms of up to 3 years at a time).

  • Invoice finance facilities and additional advance on an SME’s debtor book. Either in terms of the facility limit or advance percentage. To supplement an invoice finance facility on commercial terms already in place (available for terms up to 3 years at a time).

  • Term loan for debt consolidation or refinancing provision of a new term loan to replace an existing loan. Revolving facility or invoice finance facility which is at risk due to deteriorating security values. Where for cash flow reasons the borrower is struggling to meet the existing repayment structure.

  • Revolving facility refinances preservation of part or all of an existing overdraft, or other revolving facilities.

  • Invoice finance refinances preservation of part or all an existing invoice finance facility.

  • Trade credit guarantee providing a guarantee on new or increased monthly trade credit account. Where the SME is viable but has inadequate security to meet a lender’s normal requirements. The level of credit requested piloted through several large businesses supplying to SME trade customers and generally available for terms up to 1 year.

Please note that participating lenders will generally only provide EFG facilities of types which are consistent with their normal commercial lending product. Offerings and are under no obligation to offer the full range of types or values of EFG-backed facilities.

Lenders and Application Process

There are over 40 participating lenders ranging from the main high street banks to smaller specialist institutions. Some of which have a specific geographic, sectoral or product focus.

To consider using EFG, lenders require

  • The same information that they would use to process a comparable commercial loan application.

  • Details of any other publicly-funded grants

  • Other support received by the business in the preceding three years. Participating lenders will advise you of their specific requirements. Failure to provide the required information may delay the loan decision or lead to a loan decline.

Lenders will typically assess loan applications against their standard lending criteria to determine whether they wish to lend.

  • Where the lender determines, the business is viable (i.e. able to meet the monthly loan repayments and ultimately repay the loan in full) but is lacking adequate security to meet the lenders normal lending requirements, they can consider providing a loan under EFG.

  • The EFG managed by British Business Financial Services, a wholly-owned subsidiary of British Business Bank plc, remains on the balance sheet of the Department for Business, Innovation, and Skills.

  • The government plays no role in the lending decision-making process. Once the lender has determined that use of EFG is likely to be appropriate they confirm eligibility and record details of the borrower and their facility via a secure web portal.

Most of all businesses that do not meet the lender’s viability requirements are not suitable for EFG. The EFG facilitates lending to businesses which can ultimately repay their loan in full. The EFG does not support nonviable businesses.

Government Guarantee

By providing lenders with a government-backed guarantee for 75% of the value of each individual loan, subject to a cap on the total exposure across a lender’s annual portfolio of EFG-backed lending.

  • Government and lenders share the risk and facilitate lending that would otherwise not take place.

  • The guarantee provides protection to the lender furthermore in the event of default by the borrower – it is not insurance for the borrower in the event of their inability to repay the loan.

As with any other commercial transaction, the borrower is responsible for repayment of 100% of the EFG facility. The 75% guarantee to the lender does not mean that the borrower is only liable for 25% of the debt. The lender When defaults occur, follow standard commercial recovery procedures. This includes the realisation of any security held and calling upon any personal guarantees which may have been provided before they make a claim against the government guarantee.

The interest rate charged and any other fees and charges applied to the loan are commercial matters for the lender.

Businesses supported under EFG are liable for additional costs and fees:

  • Pay a 2% annual premium which partially covers the cost of providing the guarantee.

The premiums assessed and collected quarterly in advance for the life of the loan. Based on the outstanding capital balance of the loan (for invoice finance and overdraft guarantees the premium is assessed on the agreed facility limit).

The lender provides the borrower with a premium schedule as part of their loan documentation.  ‘BIS LOAN GUARANTEE’ the description for Direct Debit collection

Security and Personal Guarantees 

Under EFG, lenders are entitled to take security, including personal guarantees. Noteworthy, this is standard commercial practice and an established mechanism for ensuring a degree of personal commitment. Most of all to repayment of the loan by individuals with a beneficial interest in the business.

The only exception from normal commercial practice is that lenders are expressly prohibited from taking a charge over a principal private residence of a borrower or guarantor as security for an EFG facility.

In EFG this means there is a three-way risk sharing between:

  • Borrower

  • Lender

The extent of any security or guarantee was taken is a commercial matter for the lender, but any security taken applies to the debt and may not be attributed solely or preferentially to cover the 25% of the EFG loan not covered by the government guarantee.

Furthermore, the borrower always remains liable for repayment of 100% of the loan. In the event of a default, any remaining loss faced by the lender after recoveries will be borne by government and lender in the ratio 75:25.

Also, EFG should not be seen by borrowers or advisers as a mechanism for putting personal assets beyond consideration.

Consequently, should EFG be refused based on limited security BIS will support lender's decisions

Wendy Kipling

The Virtual Mentor

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Personal Development

Watch this video by British Business Bank to find out more.

 

 Further Reading

  1. Electric Van Grant

Summary

The decision ultimately lies with the bank, therefore!. As a result, make sure your business plan delivers excellent returns.


Question

Finally, has your bank mentioned the EFG? You can leave your comment below.