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Background
The Enterprise Finance Guarantee (EFG) is a government loan guarantee scheme delivered by participating lenders. The Business Link website provides a comprehensive list of the participating lenders (of which there are currently 37) www.businesslink.gov.uk.  The EFG scheme was launched by the government with a fanfare on 14 January 2009 and had been due to end on 31 March 2010. The scheme was initially welcomed by the business community.

The stated aim of the EFG is to support the availability of working capital and investment funding for small and medium businesses. However, according to research conducted by Clifton Asset Management, the majority of small business owner managers believe there is ‘no point in applying for an EFG'. A director at CAM noted that ‘over one in four people spoken to didn't even know what the EFG was'.

Despite this, in the pre-Budget Report announcement, the Chancellor announced that the EFG scheme will be extended for a further 12 months enabling a further £500million of additional bank lending to SMEs between April 2010 and March 2011.

Purposes of loan
As a reminder - if the eligibility criteria are met, the EFG will provide a 75% government guarantee to the lender, to give them the confidence to lend.

Businesses can be lent money for the following purposes:

• new term loans for growing businesses where a sound proposal may otherwise be declined due to a lack of security (investment funding)
• conversion of all or part of an existing overdraft into a term loan in order to free up capacity in the existing overdraft to meet on-going working capital needs (working capital funding)
• to boost the security available where term loans have already been made to SMEs but a decline in security values are causing the lender to require early repayment of the existing debt (bolster security value)
• a guarantee on new or increased overdraft borrowing facilities for SMEs encountering short term cash flow difficulties
• a guarantee on invoice finance facilities to support an agreed additional advance on an SMEs debtor book

The EFG allows lenders to take an unsupported personal guarantee on an EFG loan for up to the full value of the loan. Lenders are not permitted to take a direct charge over a principal private residence for a new EFG loan.

How does a business apply for an EFG loan?
Firstly the lender decides whether or not to lend based on their commercial criteria. Next the lender checks the potential borrower against the eligibility criteria which are set out below:

• the business is unable to provide sufficient security to the lender
• a small business operating in the UK with an annual turnover of less than £25million
• a borrowing requirement of £1,000 to £1million
• a loan term of between 3 months and 10 years
• the business is in an eligible sector - most sectors are eligible
• the borrowing must be needed for an eligible purpose

How much will getting an EFG loan cost?
As well as capital and interest payments to a lender, and any arrangement fee charged, a premium is also payable to the Department for Business, Innovations and Skills (BIS). The premium is 2% per annum on the outstanding balance of the loan, assessed and collected quarterly in advance during the life of the loan.

As at 9 December 2009, more than 6,850 businesses have been offered loans totalling £692million through the EFG scheme and more than £1billion of eligible applications have been granted or are being processed or assessed according to BIS www.bis.gov.uk