A government scheme designed to increase lending to small businesses has announced that its lending has hit a three-year high.
The Enterprise Finance Guarantee (EFG) scheme lent out £111 million to small and medium sized enterprises SMEs in the third quarter of 2013, up from £96 million in the same quarter in 2012. This is the highest quarterly amount since 2010.
The figures show that the value of EFG loans drawn by businesses in the quarter was £87 million, the highest since 2011.
The lending data is a sign that businesses are increasingly confident about borrowing money and investing and is also a 20 per cent improvement on the total loan value of £92 million lent out in the first quarter of 2013.
Though there has been a big improvement in lending through the scheme, the amounts still fall well short of lending levels at the peak of the scheme in Q2 and Q3 of 2009 when 2,376 and 2,030 loans were offered totalling £255m and £217m respectively.
What is the EFG?
The EFG is a demand-led scheme that allows banks to lend to SMEs who may not otherwise be able to receive credit.
It was launched in 2009, to replace the Small Firms Loan Guarantee
It provides the banks with a government guarantee for 75 per cent of the loan value. Since May 2010, more than 13,400 SMEs have been offered EFG loans with a total value of £1.4 billion.
Established SMEs have benefited the most from the scheme but new business start-up’s accounted for 37 per cent of all loans offered in the first three years of the scheme, including 17 per cent to businesses that have been going for three months or less.
How does the scheme work?
The scheme works via a normal lending arrangement. The cash for an EFG loan comes from the bank but the government has agreed to underwrite 75 per cent of the loan. This makes it easier for smaller businesses to secure a loan without the necessary collateral.
Loan amounts are between £1,000 and £1 million which can be repaid over a period of three months to 10 years.
The cash can be paid to your business in one lump sum or gradually to suit the needs of your businesses strategy.
Loans can be for a variety of different purposes, including new term loans to boost the working capital of an SME or to use for research and development. These loans can be partially secured or unsecured.
They can also be used to refinance an existing loan and can be applied for by firms that are struggling to make repayments on a loan because of weak cashflow.
Another option is for firms that use an invoice finance guarantee system to use the scheme to get a loan that can be used to increase the amount of cash they can get in advance of the payment of an invoice.
If a firm is seen as a viable company it can use funds from the scheme to extend an overdraft guarantee facility.
The repayment and costs of the EFG
Firms using the scheme have to pay a premium to the Department for Business, Innovation and Skills (BIS), equivalent to two per cent a year on the balance of the loan at the end of the year as well as the normal capital and interest payments to the lender. Payments to the government are made quarterly.
Who can apply for the scheme?
The government wants to widen the scope of the EFG to counteract the fall in business lending. Previously loans for the scheme through the government were only available from a small number of pre-approved banks.
A larger number of banks can now issue loans through the scheme and has been extended to include small community development finance institutions.
The government has also extended the scheme so it will run until 2015.
The scheme is open to firms with a turnover of £41 million or less and from almost all business sectors. The only sector that is not eligible is firms in the coal, forestry, fisheries, transport and agriculture industries.
Applications can be rejected if you are looking for export aid you use EFG funding abroad or your firm makes preferential use of domestic over imported goods.
The decision on whether or not a loan is offered rests with the bank or financial institution that receives the application. The government is not involved in the decision making process.
The lender will assess the application using its normal criteria and will only use the Enterprise Finance Guarantee criteria if it is unable to justify the loan using normal methods.
If a firm is unsuccessful, they can appeal against the decision.
EFG finance is available through 42 finance providers, including all of the main high street banks. The figures reveal that substantial progress has been made in increasing lending since the same period in 2012.
In particular, Barclays Bank has been increasing the amount of EFG lending consistently, offering nearly twice as many loans to firms compared with last year, despite the overall number of loans being offered only increasing slightly.
Business Secretary Vince Cable said: “Ensuring that small businesses have access to the finance they need, in order to grow and thrive, remains a crucial issue. The EFG scheme is making a vital contribution and businesses needing finance should take heart that the banks seem to have upped their game.
"However, there are long-standing problems with the finance markets which need addressing, and that is why I have created the British Business Bank. We need a much more competitive and diverse market which businesses of all sizes can have confidence in, and which helps to build a stronger economy."
However, the scheme has not always been successful. In September 2012, Business Minister Michael Fallon was forced to intervene and write to the chief executives of the five main banks to challenge them to increase levels of lending through the scheme.
Federation of Small Businesses national chairman John Allan said: “To maintain the momentum the FSB continues to press the government to look at how the EFG can spread its scope, such as making the scheme more flexible for alternative financiers and community development finance institutions.”
How to apply for an Enterprise Finance Guarantee loan
You apply for a loan through a normal application form and you have to supply a number of supporting documents including a business plan, management accounts and financial projections.
You can find more information on the Enterprise Finance Guarantee scheme on the Department of Business, Innovation and Skills (BIS) website.
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