The Government announced on 14 January 2009 three new initiatives designed to address the cash flow, credit and investment needs of small and medium businesses. The new initiatives include:
- An Enterprise Finance Guarantee scheme, securing up to £1.3bn of
additional bank loans to small firms with a turnover of up to £25m; - A £10bn Working Capital Scheme, securing up to £20bn of short term bank lending to companies with a turnover of up to £500m; and
- A £75m Capital for Enterprise Fund (£50m from Government augmented by £25m from the banks) to invest in small businesses which need equity.
The Working Capital Scheme still requires EU approval and the Capital for Enterprise Fund is small and so is likely to have very selective investment criteria. Therefore it is likely that the Enterprise Finance Guarantee scheme will, initially at least, be of most relevance to our clients. Some features of the Enterprise Finance Guarantee scheme include:
- A normal commercial loan is taken out from a bank. So far the scheme is available through 7 banking groups;
- Under the scheme the government will guarantee 75% of the loan;
- On top of whatever payments are due to the bank the government charge a premium of 2% of the outstanding loan balance (1.5% during 2009) payable quarterly in advance;
- Loans are between £1,000 and £1m and are repayable over a period of three months to ten years;
- Eligible for businesses with turnover up to £25m;
- Most business sectors eligible – principal exclusions include the agriculture, coal and steel sectors, and the financing of individual export orders;
- As with all loans, applications will typically involve a business plan, forecasts, statutory accounts and management accounts.
The Enterprise Finance Guarantee scheme has effectively replaced the Small Firm Loan Guarantee scheme by widening the eligibility criteria. Loans under the Small Firm Loan Guarantee scheme do not count towards eligible balances on the Enterprise Finance Guarantee scheme and Small Firms Loan Guarantee scheme loans will also qualify for the discounted 1.5% premium during 2009. Existing loans on the Small Firm Loan Guarantee scheme not yet drawn down will expire on 31 March 2009 so if you have such a loan with amounts not yet drawn-down it might be worth drawing-down the maximum available now rather than having to apply for a new loan in a few months time.
With the country in recession and banking liquidity dried up following the credit crunch the government clearly had to be seen to be doing something, and anything which may create more credit for small businesses must surely be welcomed. My personal view however is that the old Small Firms Loan Guarantee scheme was not universally popular among the banks, and the Enterprise Finance Guarantee scheme was rushed out too quickly by the government to the extent that many bank managers are currently unsure as to how to lend under the new scheme.
Bankers tell me that if a lack of security is the only issue preventing the bank making a business loan then the new scheme will allow the bank to make what is effectively a cashflow loan (assuming the bank are willing to risk the 25% of the loan that will remain unsecured). However, other than allowing loans to be made to bigger or older companies that were previously ineligible under the old scheme, the new scheme will probably not result in loans being made to companies that previously would not have qualified for a loan. This is because the banks still need to make their own commercial decision on the loan and be comfortable in making a loan that is 25% unsecured. Therefore it is questionable whether the new scheme really will create any new credit for small businesses.
Clearly however, businesses that meet all the lending criteria, have a robust business plan supported by historical financial information and reasonable forecasts indicating how the loan will be serviceable, would be eligible under the Enterprise Finance Guarantee scheme. We are able to provide assistance in collating your business plan and preparing financial projections to support an application under the new scheme. We can also introduce you to suitable bank managers willing to look into your application.
To discuss your financing needs, please contact us.