NEW LOAN GUARANTEE SCHEMES

In January 2009, the UK Government announced new measures designed to provide financial support to SME’S experiencing credit difficulties in securing the finance that they require for working capital needs and for future investment. It is hoped that the measures will improve the availability of working capital while also encouraging lending by the banks for business growth and development where previously cases may have been declined due to lack of security.  It is still essential that viable business models exists and are supported by sound documentation at the application stage. The schemes are an extension of the announcements made in the pre Budget report in late 2008.

The existing Small Firms’ Loan Guarantee Scheme has been suspended in the interim, with the following schemes being introduced:

Enterprise Finance Guarantee Scheme

• Operating until March 2010.
• For companies with a turnover up to £25m.
• The Government will guarantee 75% of £1.3bn loans made to  businesses in the range of £1k to £1m, repayable over a period of  up to 10 years. Companies currently with overdrafts may be able to convert all or part of the overdraft into a term loan to further utilise the overdraft for working capital needs. In such cases lenders should continue to provide an appropriate overdraft subject to the Companies ability to service both the term loan and overdraft. 
• Business in the agriculture, coal and steel industries are not eligible to participate in the scheme. 
• Companies currently with loans managed under the Small Firm Loan Guarantee (SFLG) Scheme will not affect their eligibility for funding under the EFG Scheme. The EFG Scheme aims to help more small businesses providing the ability to convert an overdraft to a loan, an increase upper lending limit and an increase in the turnover eligible companies can have.

Working Capital Scheme

• For companies with a turnover up to £500m.
• The Government will guarantee 50% of £20bn short term loans made to businesses to cover both existing and new loans.
• Loans will be submitted by the Banks to the BERR (Department for Business, Enterprise & Regulatory Reform) who will guarantee 50% of the value of the loan with the Bank taking the remaining risk.

Capital for Enterprise Fund

• For companies with a turnover up to £50m.
• £50m will be provided by the Government with a further £25m provided in aggregate by Barclays, HSBC, Lloyds and RBS.
• Companies can then sell debt in exchange for equity stakes in their company of between £250k and £2m.

In each case, some of the costs to the bank in submitting loans for guarantee may be passed on to customers, in addition to other standard arrangement fees.

In addition to the above measures it may also be possible to obtain funding from lenders under the European Investment Bank (EIB) Scheme – Loans for SME’s.  Lenders in the UK have access to limited funds in the scheme as they will be able to obtain preferential funding from the EIB rather than from the conventional money markets. Not all companies are eligible to participate in the scheme with the principal assumption being the property sector.

What happens now?
With banking arrangements as tight as they are currently, even simply renewing existing facilities can require a business plan and/or financial projections.  In addition, an internal review of operations and finances may provide an indication of the areas of strength and weakness in a business and allow for the appropriate action to be taken to ensure to focus on the profitable and cash generative areas of business.

Although costs will be incurred in the planning process, Scottish Enterprise may be in a position to provide financial assistance for up to 50% of related professional fees.

Who to Contact

Contact Chris Horne or Lyndsay Brown on 0141 942 0722 for further information or advice.