Enterprise Finance Guarantee

The Enterprise Finance Guarantee (EFG) is a UK government-guaranteed lending scheme intended to help smaller viable businesses who may be struggling to secure finance, by facilitating bank loans of between £1,000 and £1 million.
It is intended to enable banks to lend to viable small businesses who are unable to provide the security that the bank would otherwise require. The government announced the launch of the Enterprise Finance Guarantee Scheme (EFG) in November 2008 to provide targeted intervention for viable
SMEs, close to the margins on risk, who could not access debt
finance during times of tight credit
conditions. EFG replaced the previous Small Firms Loan Guarantee scheme.
Under the scheme, the decision on whether or not to lend rests solely with the participating bank. The Government meets some of the bad debt costs incurred by the lender on the scheme loans. The borrower pays interest and fees to the participating bank on normal commercial terms; and in addition the borrower pays a quarterly fee to the Government.
In total, for its first period from January 2009 to March 2010 the Government announced that it would support a total of up to £1,300 million loans under the scheme. For its second period from April 2010 to March 2011 the Government announced that it would support a total of up to £500m loans under the scheme.
Details.
In his Pre-Budget Report, presented 24 November 2008, the Chancellor announced a Small Business Finance Scheme. This went live as the Enterprise Finance Guarantee on 14 January 2009.
The government offer to bear 75% of the risk of default on each eligible individual loan, subject to a cap on the total claims that may be made by each participating bank.
EFG has replaced the Small Firms Loans Guarantee (SFLG) Scheme. It has wider criteria, in that it offers guarantees of loans of up to £1 million, rather than £250,000, and is available to businesses with turnover of up to £41m, rather than £5.6m. It provides lesser support to lenders, in that the total amount paid by the Government to each participating bank may not exceed 9.75% of the total amount advanced by that bank on all loans in the period, whereas SFLG contained no such cap. It allows the participating bank to insist, for the first time, on personal guarantees.
The scheme is open to businesses with an annual turnover of up to £41m, seeking loans of £1,000 to £1 million, repayable over a period of 3 months to 10 years. State aid rules restrict or exclude businesses in certain industries such as agriculture, coal and transport.
The scheme is only open to viable businesses with no security or insufficient security.
The purpose of the guarantee is to support new or existing borrowing or converting an existing overdraft into a loan freeing money for working capital. An important point is that the decisions on loans are made by the lenders, not BIS.
The cost of the guarantees to the borrower is 2% per annum of the outstanding balance, collected quarterly, payable to BIS. BIS are offering a discount of 25% (making the cost of guarantees 1.5% per annum) for all premiums successfully collected in 2009.
Under the EFG scheme the UK government, through its Department for Business, Innovation and Skills (BIS) will guarantee 75% of any loans made, with the bank covering the remaining 25%. The guarantees will mean that the government, or taxpayers, will pick up three-quarters of the tab for any bad loans for which a claim can be made.
However, lenders participating in the scheme cannot exceed claiming back more than 13% of the total amount lent under EFG. Therefore, only 9.75% of the total loan portfolio is recoverable (75% of value of loans recoverable until ceiling of 13% is reached = 9.75% total amount recoverable by scheme participants making loans).
The maximum cost to the taxpayer is the 9.75% less the total fees collected from all borrowers.
The Enterprise Finance Guarantee applies to loans, and can also be used to convert existing overdrafts into loans to enable businesses to free up their current overdraft facilities to meet working capital demands.
The EFG is designed primarily as a means of providing working capital to businesses, however loans can also be provided for other purposes such as asset purchase, business expansion or acquisition, or property/equipment purchase.
The EFG was initially managed on behalf of the Government by Capital for Enterprise Limited (CfEL), an arm's length body which was the UK Government's centre of knowledge and expertise in SME finance interventions. On 1 October 2013, CfEL became part of the British Business Bank which is now responsible for the EFG.
The EFG scheme has been temporarily replaced by the Coronavirus Business Interruption Loan (CBIL) scheme in response to the global COVID-19 pandemic, although there are no indications of when, or indeed if, the EFG scheme will be reinstated. Some experts have called for the scheme to be reinstated alongside the CBIL scheme. 
The CBIL scheme effectively replaced the EFG scheme to enable rapid delivery through main and secondary lenders utilising an already established platform of delivery that was used to distribute the EFG funding to businesses. There are some key changes to the format of the CBIL loan however, of notable value; the removal of the requirement for directors to personally guarantee the loans (up to £250,000) and secondly, an increase in the government backed guarantee to 80%.
Main Principles.
BIS requires that before sanctioning any facilities under EFG the Bank has confirmed the following:
Purpose of Facility.
• EFG loans may only be used for business purposes, principally to provide working capital, or to fund expansion or capital expenditure in the UK. Other purposes such as acquisition/purchase of businesses, land/property purchase, and start-up costs are also permitted.
• EFG loans may be used to refinance existing overdraft facilities afforded by the Bank. The Bank must however continue to provide an appropriate working capital facility (i.e. continue to make available an overdraft) should existing borrowing be refinanced and the customer still wishes an overdraft. The level of any continuing overdraft is to be determined by the Bank in that it does not necessarily require to equal the amount of the overdraft which is being refinanced by EFG.
• EFG loans can be used to fund share purchases in respect of business acquisition transactions, subject to the Bank being satisfied that structuring the purchase in such a manner is appropriate.
• EFG loans are available to businesses which export but may not be used to finance large individual transactions which would be more suited to Trade Finance facilities.
• EFG finance may be used to refinance any loan facilities (apart from an SFLGS loan) where the Bank are facing such a large security shortfall that they have made a decision to call up the loan. Such instances will, however, be extremely rare. However, in a non-distress scenario, EFG finance cannot be used to refinance loans which we have afforded or loans which have been afforded by other lenders.
EFG Parameters.
Borrowing Amount
List of Eligible Lenders.
The following main lenders will lend to eligible businesses under Enterprise Finance Guarantee:
Comparison with its predecessor, The Small Firms Loan Guarantee Scheme, SFLG.
The objectives of SFLG are summarised in the 2004 Graham Report, which carried out a wide-ranging review of the scheme:
The Small Firm Loan Guarantee scheme went through various small changes during its life, from 1981 to 13 January 2009: 
The scheme has consistently been focused on new start up and early stage businesses.
The maximum loan under the scheme was £250,000.
For loans written from April 2003 the guarantee rate was 75%. 
In its peak years of take-up (1995 and 1996), just over 7,000 loans were guaranteed in each year. The Graham Review saw a general tightening of eligibility criteria. 
The default rate on SFLG loans has been consistently high: 
In the year 2008/9 the total amount paid out by the Government to banks under the guarantees was £84.6m.
Progress on EFG.
In his Pre Budget Report of 9 December 2009 the Chancellor advised that:
in January we launched the Enterprise Finance Guarantee which has already offered government guarantees on bank loans to over 6,000 businesses.
Today I have decided to extend this scheme for a further 12 months which will guarantee a further £500m of loans to small businesses.
References.
1.www.cbpartners.org/images/Minutes-Burnley-Forum/EFG-Scheme.doc
2.http://www.businesslink.gov.uk/bdotg/action/gsdDetail?r.lc=en&type=GSD&searchQueryId=1021&searchTerm=enterprise+finance+guarantee&page=1&itemId=1081834978&searchId=3&refpage=4
3.http://www.hsbc.co.uk/1/2/business/finance-borrowing/enterprise-finance-guarantee
4.http://www.lloydstsbbusiness.com/finance/enterprisefinanceguarantee.asp
5.http://bytestart.co.uk/content/finance/funding/Enterprise-Finance-Guarantee-Scheme.shtml
6.http://www.bytestart.co.uk/content/finance/43_1/efp-scheme-progress.shtml
7.http://www.hm-treasury.gov.uk/graham_review_loan_guarantee.htm
8.http://www.berr.gov.uk/files/file52193.pdf
9.http://www.berr.gov.uk/files/file47204.pdf