- Access to finance
- Response to COVID-19
- Support of SMEs
Enterprise Finance Guarantee scheme (EFG)
Enterprise Finance Guarantee scheme (EFG)
Launched in 2009, the Enterprise Finance Guarantee scheme (EFG) is a state-guaranteed lending scheme for small and medium-sized enterprises (SMEs) with inadequate security to meet a lender’s normal requirements. Under this scheme, the lending decision rests solely with the lender, and the borrower pays interest and fees to the lender and to the government. Start-ups are not eligible under this scheme and there are further eligibility criteria:
- The SME operates in the UK, with an annual turnover of no more than £41 million (€45.1 million as at 13 June 2020);
- The SME operates in an eligible sector. Not eligible sectors are coal, forestry, fisheries, transport and agriculture;
- The available finance is between £1,000 and £1.2 million (between €1,000 and €1.32 million as at 13 June 2020);
- The finance is required for an eligible business purpose (examples) and the SME presents a sound borrowing proposal and business plan.
A number of temporary business financing schemes have been launched in response to the COVID-19 pandemic.
The scheme designed for SMEs is the Coronavirus Business Interruption Loan Scheme (CBILS), which is an extension of the Enterprise Finance Guarantee scheme. A business is eligible if it is based in the UK; has an annual turnover of up to £45 million (€50 million as at 13 June 2020); and it has been adversely affected by the coronavirus pandemic, however, it would be viable under normal circumstances.
The temporary schemes designed for larger firms are the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Covid Corporate Financing Facility (CCFF). A business is eligible for CLBILS if it meets the same criteria as those outlined under the CBILS but its annual turnover is over £45 million (€50 million as at 13 June 2020). The available loan and other finance can be up to 25% of the company’s turnover, to a maximum of £200 million (€220 million as at 13 June 2020).
The EFG scheme was established in 2009 and in 2017, it was extended until 2021. Run by the government's British Business Bank, the EGF is designed to increase the lending available for SMEs which do not have adequate security to access regular business loans. EFG loans are delivered through accredited business lenders, with the government, that is the taxpayer, underwriting 75% of the loan. This means that the lender is only exposed to part of the risk, however, the borrowing firm always remains liable for the debt and pays a 2% annual fee to the government. The repayment period for the loans ranges between three months and ten years. Besides the business loans, other funding options are also available under this scheme, such as revolving credit facilities (for example overdrafts), invoice finance, and refinancing and debt consolidation.
Response to COVID-19
In response to the COVID-19 pandemic, the UK government has introduced a number of temporary financial support measures to support businesses. The Chancellor, the Governor of the Bank of England, and the CEO of the Financial Conduct Authority together addressed Britain’s banking sector asking them not to allow viable companies to collapse because of the COVID-19 crisis.
The temporary measure supporting SMEs is the Coronavirus Business Interruption Loan Scheme (CBILS), also being run by the British Business Bank. Companies can access loans and other finances up to £5 million (€5.5 million as at 13 June 2020), 80% of which is underwritten by the government, however, the borrower is 100% liable for the debt. The scheme was launched in March 2020. Since its introduction, it has been expanded and significantly modified with more businesses becoming eligible. The scheme is open to new applications until 30 September 2020. CBILS allows UK-based SMEs with an annual turnover of up to £45 million (€49.5 million as at 13 June 2020), to access loans, overdrafts, invoice finance and asset finance of up to £5 million (€5.5 million as at 13 June 2020), for up to 6 years, to compensate for revenues lost or deferred because of the pandemic. The first 12 months of interest payments and any fees levied by the bank providing the loan are covered by the government, which means that businesses do not have any initial costs and they can benefit from lower initial repayments. The scheme is backed by the government-owned British Business Bank and delivered through 40 accredited commercial lenders, including all the major banks as well as other financial institutions. As with the EGF scheme, decision-making on eligibility for CBILS is fully delegated to the lenders.
The temporary schemes introduced as part of the response to the COVID-19 pandemic are the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Covid Corporate Financing Facility (CCFF). The Coronavirus Large Business Interruption Loan Scheme is very similar to the CBILS but it is available for companies with an annual turnover over £45 million (€50 million as at 13 June 2020). The available loan and other finance can be up to 25% of the company’s turnover, to a maximum of £200 million (€220 million as at 13 June 2020). Businesses borrowing more than £50 million (€55 million as at June 2020) are subject to restrictions on dividend payments, senior pay and share buy-backs during the period of the loan. The deadline for submitting applications to the CLBILS is 20 October 2020 (as at 24 August 2020).
The Covid Corporate Financing Facility (CCFF) was launched by the Bank of England and the Treasury in March 2020 and it is open to new applications until March 2021. The scheme aims to help businesses to pay wages and suppliers, even while experiencing severe disruption to cashflows. The scheme offers financing on terms comparable to normal market terms available to companies before the COVID-19 crisis, and it is open to firms that can demonstrate that they were in good financial health prior to the crisis: eligibility is based on firms’ credit ratings on 1 March 2020.
- National funds
The UK government has created the legal framework and guarantees the finance under the EFG (75%) and the COVID-19 temporary schemes (80%) - if the loans are not repaid by the supported business, the government repays the loan to the lender (financial institution).
Accredited business lenders (financial institutions).
Since its launch in 2009 until December 2017, the British Business Bank’s Enterprise Finance Guarantee (EFG) has supported the provision of over £3.3bn (€3.63 million as at 13 June 2020) of finance to more than 35,000 smaller businesses in the UK. New lending under the EFG scheme was at its height when UK GDP growth was at its lowest level after the onset of the global financial crisis, and the use of the scheme has declined over time. Bank credit drawn by SMEs under the scheme was £226 million (€249 million as at 13 June 2020) in the year to June 30 2019, 70% less than the amount offered a decade earlier. In the three months between July and September 2009, 1,921 loans were given, with a combined value of £203 million, a great deal less than the total of 442 loans worth a combined £47.6 million (€52 million as at 13 June 2020) given between April and June 2019. The decline may reflect the fact that small businesses have become less inclined to use external credit since the financial crisis.
According to the most recent economic impact evaluation, companies benefitting from the scheme demonstrated approximately 7% faster employment and turnover growth than those who did not use it. The positive impact was larger for relatively young and small firms, perhaps because they typically face financial constraints due to a combination of a lack of credit history and limited collaterals. The evaluation found that the majority (63%) of firms accessing EFG had fewer than 10 employees, 32% had between 10 and 49 employees and 5% had more than 49 employees.
According to statistical data about the CBILS, 60,409 businesses participated in the scheme by 16 August, 2020 and the total value of loans provided was £13.7 billion (€15.7 billion, as at 24 August 2020).
As for the CLBILS, 516 businesses participated in the scheme by 16 August, 2020 and the total value of loans provided was £3.6 billion (€4.0 billion, as at 24 August 2020). Finally, according to data from the Bank of England, by 19 August, 2020, CCFF funding was awarded to 283 businesses, at a total value of £17.5 million (€19.3 million, as at 24 August, 2020).
The scheme offers loans and other finance to viable companies that would otherwise be unable to access such loans, benefitting companies at the time of the financial and economic crisis in the early 2010s. The government guarantee also gave lenders confidence in providing finance to SMEs at a time when the banking and financial sector was in deep crisis.
The scheme is proven to enable companies to employ more people and generate higher turnover. According to a survey conducted in 2013, more than 80% of businesses benefitting from the scheme were satisfied with their EFG loan. The finance is available from a large number of lenders and the application procedure is reasonably simple and fast. Businesses can benefit from more than one scheme at a time, as long as the European Union rules about state aid are followed.
A 2013 survey for the Department for Business, Innovation and Skills (BIS, currently known as the Department for Business, Energy and Industrial Strategy, BEIS) found that one in seven borrowers on the scheme believed their bank had not made clear that business owners were liable for the entire value of the loan. These business owners mistakenly believe the EFG protects their personal assets in the event of the business becoming insolvent.
EFG loans are riskier than others: according to government statistics, the default rate in the first three years of the scheme was 28%, compared to 4% for the average SME loan.