The UK government has set up a guarantee scheme to help small businesses to obtain bank loans where they would otherwise have been refused a loan because they could not provide sufficient security. Small businesses may also find bank loans which are financed by the European Investment Bank.
Enterprise Finance Guarantee
The Enterprise Finance Guarantee (EFG) scheme was introduced by the UK government as a successor to the Small Firms Loan Guarantee (SFLG) scheme which has been suspended. The EFG scheme intends to help small firms which may not otherwise be able to obtain bank loans, owing to the absence of a financial track record or the inability to provide sufficient security for a bank loan.
The EFG scheme supports bank lending for terms of three months to ten years to businesses with a turnover up to £25 million. The scheme aims to provide guarantees for loans between £1,000 and
£1 million. The government guarantees 75% of the value of the loan. A number of large lenders usually participate in the scheme. Generally, a small business would need to show the lender that it is capable of repaying the loan in full if it obtains a guaranteed finance under the EFG scheme. The EFG scheme can provide guarantees in connection with new term loans, refinancing of existing term loans, conversion of an overdraft into a loan, new overdraft borrowing or an additional advance to support existing invoice finance facilities. The UK government charges a premium of 2% of the loan balance to partly cover the cost of the guarantee. This premium is assessed and collected on a quarterly basis.
European Investment Bank
Some banks have obtained financing from the European Investment Bank to enable them to offer low cost long-term loans to small businesses. Businesses may apply for these loans if they have 250 or fewer employees. The lower cost may be passed on by the bank in the form of lower interest or of cash back. These loans are not given to cover short-term working capital requirements but must be for a term of at least two years. A list of financial institutions offering EIB financed loans is available on the UK government’s Business Link website.
Big Society Capital
In July 2011, the UK government launched the Big Society Bank, known officially as the Big Society Capital. This acts as a wholesale finance institution, providing equity and loan financing for organisations, including financial institutions which lend to social enterprises. This facilitates the onward lending by community development finance institutions to social enterprises and organisations. The objective is to create an environment where investors may be linked to social enterprises and where social organisations may obtain capital from various sources.