The banks won’t lend without security – oh yes they will!

Posted on January 10, 2014 by FGL

For those of you who think getting money out of the bank without security is a bit of a pantomime, then read on, you may be pleasantly surprised what they could do for you.

The Enterprise Finance Guarantee (EFG) is a loan guarantee scheme to facilitate lending to viable businesses that have been turned down for a normal commercial loan due to a lack of security or a proven track record.

Most banks are included in the scheme – and they are the ones that still make the decision and actually lend you the money.

The following is a guideline only – but the EFG is generally open to viable businesses that:

  • Operate in the UK
  • Have a turnover of less than £41 million
  • Are seeking finance between £1,000 and £1 million
  • Want repayment terms from 3 months to 10 years (less for overdraft and invoice finance facilities)
  • Operate in a sector that is eligible for EFG (most sectors are eligible)

The key word here is “VIABLE” – and in a nutshell, the banks will expect the proposition to be acceptable in all respects EXCEPT for the availability of suitable security or a proven track record. So if you’ve got a really good proposition that only lack these two criteria, don’t be put off and read on.

Types of facilities available

  • New term loans - unsecured and partially secured, for working capital or investment purposes including research and development
  • Refinancing of existing term loans - where the loan is at risk due to deteriorating value of security or where for cash flow reasons the borrower is struggling to meet existing loan repayments
  • Overdraft conversion - conversion of part of or all an existing utilised overdraft onto a term loan in order to release capacity in the overdraft to meet working capital requirements
  • Invoice finance guarantee - providing a guarantee on invoice finance facilities to support an agreed additional advance on an SME’s debtor book, to supplement the invoice finance facility on commercial terms already in place (available for terms up to three years)
  • Overdraft guarantee - providing a guarantee on new or increased overdraft 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 up to two years)

EFG facilities typically require the same information that banks need to assess a commercial loan application. Participating lenders will advise you of their specific requirements, but a well-structured proposition supported by a good (short and punchy) business plan with financials showing strong repayment capability, will generally suffice - give me a call if you need any help with this.

The Government plays no role in the loan decision process. By providing lenders with a Government-backed guarantee for 75% of the value of each individual facility, EFG facilitates lending that would otherwise not take place. The borrower is responsible for repayment of 100% of the EFG facility, not just the 25% outside the coverage of the government guarantee.

In addition to the costs and fees charged by the lender, businesses supported under EFG are required to pay an additional 2% annual premium which partially covers the cost of providing the guarantee. The premium is assessed and collected quarterly in advance throughout 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

Security and personal guarantees

Under EFG, lenders are entitled to take security, including personal guarantees. This is standard commercial practice and an established mechanism for ensuring a degree of personal commitment to repayment of the loan by the business. In EFG this means there is a three-way risk sharing between borrower, lender and the government.

When taking security, lenders are required to apply their normal commercial policies in determining the extent and value of security available. The exception to normal commercial practice is that lenders are expressly prohibited from taking a charge over a principal private residence for an EFG facility.

A personal guarantee should not be taken or attributed, solely or preferentially to cover the 25% of the EFG loan not covered by the government guarantee. The borrower is liable for repayment of 100% of the loan.

EFG should not be seen by borrowers or their advisers as a mechanism for putting personal assets beyond consideration (principal private residence excluded for the purposes of EFG). Lenders can refuse to offer EFG on the basis that the borrower had access to security which they were just not prepared to put forward.

So, don’t be put off asking your bank for lending just because you’ve not got the security to offer the bank – there are options available – and if you need any help putting a proposition together, give me a call.