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Enterprise Finance Guarantee: Guidance

1. Background

The Enterprise Finance Guarantee (EFG) is a government guarantee scheme to facilitate lending to viable small and medium sized enterprises (EFG) lacking adequate security for a normal commercial loan.

Subject to all eligibility criteria being met, the Government provides the lender with a 75% government guarantee to the lender, thus giving them the confidence to lend to the business in one of the following ways, providing between £1,000 and £1 million over a term of between three months and ten years unless otherwise specified.

The following types of lending may be guaranteed for terms of between three months and ten years (except where indicated):

  • New term loans, (unsecured and partially secured) for working capital or investment purposes
  • Refinancing of existing term loans, where the value of available security is insufficient for the lender to consider refinancing under its normal terms placing the loan at risk, or where for cash flow reasons the borrower is struggling to meet existing loan repayments 
  • Conversion of part or all of an existing utilised overdraft into a term loan in order to release capacity in the overdraft to meet working capital requirements 
  • Invoice Finance Guarantee providing a guarantee on invoice finance facilities, supporting an agreed additional advance on a Small and Medium Enterprise's (SMEs) debtor book, to supplement the invoice finance facility already in place. (Maximum term of three years) 
  • Overdraft Guarantee providing a guarantee on new or increased overdraft borrowing where the SME is viable but has inadequate security to meet a lender’s normal requirements for the level of overdraft requested. (Maximum term of two years)

The delivery of EFG, including the decision on whether or not it is appropriate to use it in connection with any specific lending transaction, is fully delegated to the participating lenders. There is no automatic entitlement to receive a guaranteed loan even if a business believes it satisfies the basic eligibility criteria.

2. Eligibility criteria

What eligibility criteria does the borrower have to meet?

The borrower will be eligible for an EFG facility if:

  • The lender would be prepared to offer the borrower a non-scheme facility if full collateral was available 
  • The lender believes that the borrower has a viable business plan and that the EFG facility can be repaid
  • The lender believes that a term loan, overdraft, or invoice finance facility is the appropriate debt instrument to use in terms of the borrower raising finance
  • The borrower is engaged in an eligible business activity
  • The EFG facility is to be used for an eligible purpose
  • The borrower’s business turnover does not exceed the annual turnover limit of £41 million.
  • The borrower does not want to borrow more than the maximum amount of £1 million or less than the minimum amount of £1,000; and
  • Provision of the EFG facility does not contravene the relevant regulations in relation to any previous State Aid received by the borrower.

Each application must therefore:

a) be deemed a viable borrowing proposition by the lender, and;

b) have no or insufficient security available to meet the lender’s normal security requirements

c) meet the basic EFG eligibility criteria

What are the basic eligibility criteria for EFG?

Term of EFG Backed Loan: An EFG backed loan may be for any term of between three months and ten years (except for the Invoice Finance Guarantee and Overdraft Guarantee Facilities which operate over maximum terms of three years and two years respectively).

Amount: £1,000 through to £1million.

Maximum turnover of Borrower: £41m per annum (where the borrower is part of a group, then the turnover limit applies to aggregated group turnover)

Types of lending able to be guaranteed

Assuming the proposal is deemed viable by the lender, there are six types of EFG lending, as follows:

  • New Term Loan, No Security Available: The borrower is unable to provide any security to the lender but has a viable business and can service a normal commercial borrowing requirement, as judged according to normal lending criteria. In these circumstances, the business is eligible for EFG for the full borrowing requirement.
  • New Term Loan, Partial Security Available: The borrower can provide some security to the lender but insufficient to fully secure the borrowing requirement. In addition, the borrower has a viable business and can support a normal commercial borrowing requirement, as judged according to normal lending criteria. In these circumstances, the business is eligible for EFG for the full borrowing requirement, but must agree to the partial security being charged alongside the EFG guarantee (any security over a principal private residence must be dealt with as explained later in Section 4 of these guidance notes).
  • Overdraft Consolidation: Conversion of part or all of an existing utilised overdraft into a term loan in order to release headroom for further overdraft borrowing. The intention in guaranteeing such a conversion is specifically to help put the business on a more stable financial footing and to improve the borrower’s working capital position. This facility is not to simply re-finance existing hardcore debt on to term loan: in every instance, additional exposure to the borrower by the lender should be demonstrated. If additional borrower security is available this should be charged alongside the EFG guarantee.(any security over a principal private residence must be dealt with as explained later in Section 4 of these guidance notes).
  • Term Loan Refinance: A term loan facility where the amount to be advanced to the applicant is to be used to refinance part or all of an existing loan(s) which has been made available by the lender to the applicant. In order to satisfy the eligibility criteria under this lending option, all the following criteria must be met.
  • EFG Invoice Finance Guarantee: This enables increased working capital borrowing via an additional pre-payment percentage against an existing invoice facility to viable SMEs whose borrowing level is already full based upon the invoice financier’s normal assessment of the business’ gross debtor book
  • Overdraft Borrowing Guarantee: This enables increased borrowing to viable SMEs businesses experiencing short term cash-flow difficulties that are seeking new or increased overdraft borrowing but are unable to meet a lender’s normal security requirements.

An EFG Lender may not necessarily offer the full range of lending provided for under the EFG rules if to do so would not be compatible with their normal commercial lending practices.

When is it available?

EFG is available through participating Lenders until 31 March 2015.

Are capital holidays available?

Yes, provided that the decision to provide the capital repayment holiday has been taken in accordance with the lender’s normal commercial criteria and that, in any case, the loan is fully repaid upon expiry.

Which business sectors are eligible for EFG?

Most business sectors are eligible, with a number of previously excluded sectors from SFLG now eligible.

Restrictions remain on the following sectors:

 
 Sector Eligible activities within sector 

Ineligible or excluded activities
within sector 
Aid for Export, using EFG
funding abroad, and the preferential use of domestic over imported goods:		 Companies which happen to export as part of their business may be eligible for EFG, as the restriction applies to the purpose for which the loan is required, not the fact that the business is an exporter.

Aid to export-related activities towards third countries or Member States, namely aid directly linked to the quantities exported, to the establishment and operation of a distribution network or to other current expenditure linked to export activity is ineligible for EFG.

 
Aid that is contingent upon the use of domestic over imported goods is also ineligible for EFG.

Agriculture & Horticulture: 1. Activities related to primary agricultural production is eligible but the maximum ‘grant equivalent’ state aid value is €7.500, assessed individually but generally equating to a maximum loan value of around £50,000.
2. Loans for the processing and marketing of agricultural products (beyond simply preparation for sale and packaging) are eligible for EFG. 		 1. Except when the amount of aid is fixed on the basis of the price or quantity of products put on the market.

2. Except when the amount of the aid is fixed on the basis of the price or quantity of such products purchased from primary producers or put on the market by the undertakings concerned; and/or when the aid is conditional on being partly or entirely passed on to primary producers

Banking,
Finance and Associated Services:

  Accountants, auditors, management service companies such as bookkeeping firms, tax advisers, management consultants, business advisers and companies that provide services to small firms on financial matters without actually supplying funds, including financial advisors and mortgage brokers, who are independent of banks and insurance companies, are eligible for EFG.  Any activity that involves a decision on and/or granting of finance to clients such as banks, deposit takers and building societies; companies involved in granting loans, mortgages, hire purchase or credit services; mortgage brokers that are attached to banks; venture capitalists; seed corn finance companies and stockbrokers is not eligible for EFG.
Business,
employer & professional, religious and political
membership organisations
and trade unions		   Activities of business, employer & professional, religious and political membership organisations and trade unions are not eligible for EFG.
Coal:   This sector is specifically excluded from the de minimis aid rules and is therefore ineligible for EFG.
Extraterritorial organisations
and bodies		 Activities of extraterritorial organisations and bodies are not eligible for EFG.
Education Businesses offering courses that lead to vocational qualifications and skills (i.e. those skills and qualifications directly usable in a job) are eligible, as are nursery schools, day schools and playgroups for young children and sports coaching. Formal education is excluded
Fisheries: Activities related to the production, processing and marketing of fisheries products is eligible but the maximum ‘grant equivalent’ state aid value is €30,000, assessed individually but generally equating to a maximum loan value of around £200,000.. Except when the aid:
Amount is fixed on the basis of price or quantity of products put on the market; Increases fishing capacity, expressed in terms of tonnage or power, unless it concerns aid for modernisation and improving safety standards; Is for the purchase or construction of fishing vessels
Forestry: As defined by EU guidelines, is the production of standing timber as well as the extraction and gathering of wild growing forest materials including products which undergo little processing, such as wood for fuel and industrial use. Activities aimed at directly contributing to maintaining and restoring the ecological, protective and recreational function of forests, biodiversity and healthy forest ecosystem may now be eligible for EFG subject to the relevant EU guidelines.
Insurance and Associated
Services:		 Insurance agents and brokers that do not provide insurance themselves and that are independent of insurance companies are eligible for EFG. Insurance companies and any companies attached to insurance companies are not eligible for EFG.
The Post Office (Royal Mail) However, those branches which are managed on an agency or franchise basis may be eligible for an EFG backed loan, subject to satisfying an approved EFG lender’s commercial criteria as per any other EFG loan. The Post Office Ltd is a wholly owned subsidiary of the Royal Mail, which is publicly owned, and therefore is not eligible for EFG. Therefore those Post Offices branches which are directly managed by the Post Office Ltd are not eligible for EFG.
Public
administration, national
defence, and compulsory
social security: 		All publicly owned bodies and companies are ineligible.
Transport: Rail, water and air transport are eligible
Road transport sector is eligible, but the maximum ‘grant equivalent’ value is €100,000, assessed individually but generally equating to a maximum loan value of around £650,000. 		The acquisition of road freight transport vehicles by businesses undertaking road freight transport for hire or reward is excluded under de minimis aid rules.

 

All individual decisions on the use of EFG, including application of sector and other eligibility criteria, are made by the participating Lenders based on the information provided by potential borrowers. After making the commercial decision to lend according to their own lending criteria, all lenders are to use a common set of tools provided by BIS to administer the eligibility criteria. 

State Aid implications

For eligible cases, lenders also assess the extent of the ‘grant equivalent’ De Minimis State Aid to the borrower arising from the guaranteed loan. In some cases, especially where the borrower has had previous De Minimis State Aid from other sources within the preceding three years, the relevant ceilings may limit the value of guaranteed borrowing permissible. Similarly, receiving an EFG-backed loan will limit the value of other De Minimis State Aid that the borrower will receive over the next three years.

Under the De Minimis State Aid rules the maximum assistance that can be provided in any rolling three year period is €200,000 in grant aid or €1.5m in loan guarantees. In the operation of EFG, a ‘grant equivalent’ figure is calculated for the benefit arising from each guaranteed loan and it is this that is used in the relevant eligibility test and is communicated to the borrower in the State Aid Letter. In this way aggregation of the benefit attributable to the EFG backed loan with other qualifying assistance a business may have received can be performed unambiguously on a ‘like for like’ basis.

Lower De Minimis State Aid thresholds apply in certain sectors (principally agricultural production, fisheries, and road transport) meaning that the maximum loan values possible will be considerably less than the headline £1m.

Other restrictions

Share Purchase & Management Buy Outs (MBOs)

Transfer of Ownership - Provided that the Lender, Purchaser and Vendor are all agreed that the most appropriate way to effect the transfer of a business is by the sale and purchase of shares in the business being transferred then the purchaser may borrow the necessary funds via an EFG loan.

The speculative purchase of shares or the purchase of shares which does not add value to the business itself (e.g. a business borrowing in order to buy back the shares of an existing shareholder who wishes to exit the business – which would effectively constitute EFG being used to fund a cash payment to an individual), is not eligible for EFG

Management Buy-Outs (MBOs) - MBOs (irrespective of structure) are an eligible activity, subject to the lenders satisfying themselves on viability and all other current EFG eligibility criteria. EFG-backed finance should only ever be provided by the Lender to a business as part of an MBO transaction. EFG loans directly to individuals are not eligible.

3. The EFG backed loan process

EFG Backed Loan Application Process Flowchart


4. Taking security when granting and EFG-backed loan

Overview as to Overall Position regarding New Security and EFG

If the borrower’s proposition satisfies the Lender’s normal commercial lending criteria on viability and serviceability and the lender wishes to lend, then the decision on whether to use EFG will depend upon the availability of security and finally, whether the borrower meets the EFG eligibility criteria on size, sector, turnover level etc.

The situation regarding security is as follows:

A. If the lender believes the borrower has sufficient existing security available to secure the borrowing requirement (which may, depending upon the Lender’s policy, include the personal assets of directors in the case of borrowing by a limited company), then there is, by definition, no need to use EFG.

In terms of determining whether sufficient existing security is available, the lender should consider all security which a borrower has available. As per normal commercial lending practice, this additional security may also extend to the Lender taking supported or unsupported personal guarantees from directors or third parties to guarantee the borrowings of the business.

B. If the lender believes the borrower has no security (business or personal assets) available to secure the increased borrowing requirement, then EFG can be used for the full additional borrowing requirement.

Unlike the historical position with SFLG, in which no security could be taken, the Lender is entitled to take an Unsupported Personal Guarantee from the borrower (or director or third party) as a means of demonstrating personal commitment, where doing so is consistent with the Lender’s normal commercial lending criteria.

It is therefore legitimate for the lender to operate a policy which makes granting of the EFG backed loan conditional upon the provision of an Unsupported Personal Guarantee for the full (or as much as deemed suitable by the lender) value of the proposed EFG backed loan. In this way, any personal assets amassed during the term of the loan or which, for whatever reason, were not considered suitable for charging at the time the EFG backed loan was drawn, may become accessible in the event of a default. A PG should not be taken, and nor may it be attributed, solely or preferentially to cover the 25% of the EFG not covered by the BIS guarantee.

C. If the lender deems the borrower to have partial but insufficient security available to fully secure the additional borrowing requirement, then EFG may be used to cover the full borrowing requirement, with the partial but insufficient security also being charged .This partial security may include all normal business assets and also, where deemed appropriate by the Lender, specific personal assets via a Supported Personal Guarantee. The supporting security may include property other than a principal private residence, shares or any other suitable asset owned by the guarantor.

Position regarding Principal Private Residence in Support of a Personal Guarantee or Lending to Individuals

Within the Commercial Lending Decision

Within the consideration of the availability of security, the decision on whether a lender seeks to take a charge over a principal private residence is determined according to their normal commercial credit criteria.

Where sufficient equity to support the additional borrowing requirement is available in a principal private residence but the borrower/guarantor is unwilling to provide a charge over the residence, then it is the lender’s decision whether to accept the borrower/guarantor’s stance (and thus accept that the principal private residence is beyond consideration) or to decline the loan application on the grounds that there was security available but the borrower/guarantor refused to make it available. In the event that the lender takes the former view then they may go on to consider using EFG but if they take the latter view then use of EFG would not be appropriate.

Once the Commercial Lending Decision has been made in principle and the use of EFG is being considered

Once the lender has made the decision that the proposition satisfies their normal commercial criteria but that security is inadequate then the use of EFG becomes a possibility. On entering the EFG process the lender accepts that there is now a prohibition on taking any form of direct charge over the principal private residence of the borrower/guarantor. Ministers have made it clear that they wish to avoid individuals losing their homes as a result of having personally guaranteed borrowings to businesses to which lending is also backed by EFG.

For the avoidance of doubt:

  • The existence of the EFG should not be seen by borrowers or their advisors as a mechanism for putting personal assets beyond consideration. If a lender refuses to offer an EFG on the basis the borrower/guarantor had access to security which they were not prepared to put forward, then the lender’s decision would be fully supported by BIS in event of the prospective borrower complaining to the Department for Business, Innovation & Skills (BIS) or Capital for Enterprise Ltd (CfEL)
  • Similarly, where a borrower appears to have access to security other than his/her principal private residence (e.g. an investment property, boat etc) but refuses to allow that asset to be charged to the lender, or where the asset is held jointly with another (often the spouse) and they argue that the asset cannot be offered as security because the co-owner refuses to give permission, it is the lender’s decision whether to accept the borrower/guarantor’s request to exclude such assets from consideration in making a lending decision.

In practice, the lender will probably follow one of the following approaches:

  • Where a charge over a principal private residence is deemed appropriate by the lender and the borrower/guarantor is willing to provide this charge, a split of the additional borrowing requirement into two separate loans may be appropriate; Loan 1 - a fully secured loan utilising the equity in the principle private residence (as in A above) as security and loan 2 - a separate unsecured loan (as in B above) making use of EFG.
  • Where the borrower/guarantor refuses to provide a charge over their principal private residence or other suitable personal assets, the lender can either:

a) Accept the borrower/guarantor’s stance as reasonable and provide an EFG for the full additional borrowing requirement. The lender must satisfy themselves that the borrower/guarantor is not using EFG as a mechanism to put personal assets beyond consideration; or

b) Refuse to provide additional borrowings due to lack of borrower/guarantor commitment.

5. Defaults

Under EFG, the Government guarantees to repay 75% of the principal amount of the EFG facility to the Lender, if the borrower fails to make repayments, when certain criteria are satisfied.

The Lender can claim up to 75% of the outstanding principal amount of any individual EFG facility, subject to a cap on total claims arising from a Lender’s annual EFG loan portfolio. The cap is being raised from 13% to 20% for 2012/13.

As EFG is intended to support loans to businesses that can ultimately repay the loan in full, EFG does provide protection to the borrower in case of default.

Therefore, in the event that borrower defaults on the loan repayments, the lender is entitled to pursue the borrower for full repayment of the loan as they would a normal commercial loan.

Claims on the Government guarantee are made after the realisation of any collateral available to the Lender in their relationship with the Borrower (unless that realisation process is not able to be completed within 18 months after demand for repayment was made on the Borrower, in which case the claim may be made once 18 months have elapsed from demand being made on the Borrower).

The extent to which lender seeks recovery of any funds from a borrowers under EFG is a matter for the lender to determine. In the event that any funds are subsequently recovered a proportion may be repayable to BIS up to the amount settled.
If any of the security realisation or recovery proceeds relate to the sale of a principal residential property, these proceeds should not be used to repay EFG exposure (or any SFLG exposure) and if there is any surplus, this should instead be returned to the Borrower/guarantor.

6. EFG Q&A

How long is EFG available?

  • The Government has committed funding until 2014-15, guaranteeing, subject to demand, up to £1.5billion in an additional lending over the next 3 years.

Why are banks allowed to take personal guarantees / security on EFG?

  • The taking of personal guarantees and other forms of security are standard features of commercial lending and it is only right that lenders should be permitted to use these under EFG.
  • We look to the lender to apply commercial rigours to lending decisions and to secure collateral from the borrower where appropriate.
  • We have made it clear that lenders are not permitted to take a direct charge over a principal private residence for a new EFG backed loan.
  • In guaranteeing the loan, the taxpayer is taking a risk, so it is only right that the risk is shared by the lender and the borrower, as it would be for any commercial loan. EFG allows Lenders to take an unsupported personal guarantee on an EFG backed loan for as much as is deemed appropriate (up to the full value) of the proposed EFG backed loan.

Should businesses be liable to provide personal guarantees when the Government provides a guarantee?

  • The Government guarantee is a guarantee to lenders, and its purpose is to facilitate additional bank lending that would otherwise not be available. It does not affect the liabilities on the borrower to repay the loan in full and the ability of the lender to pursue repayment from any borrower that defaults.
  • Personal guarantees and security are standard features of commercial lending and it is only right that lenders should be permitted to use this under EFG. 
  • In guaranteeing the loan, the taxpayer is taking a risk, so it is only right that the risk is shared by the lender and the borrower, as it would be for any commercial loan.

The Government cap on EFG is stopping banks from lending and shouldn’t this be scrapped?

  • The cap on defaults has not been a barrier to lending. Levels of EFG lending are significantly higher than under the proceeding SFLG scheme.
  • The rationale for a cap remains strong. The overall cap on the level of liability that Government takes on ensures that taxpayers’ money is not used to prop up failing SMEs, which in any case is not permitted under the EU de minimis aid rules. It also helps ensure that banks don’t pull the plug on SMEs that are fundamentally viable in the longer term.
  • The Government guarantee each loan in a lender’s EFG portfolio at 75% until that lender’s defaults reach the scheme cap. The Government is raising the level of the lenders EFG loan portfolio to which the government guarantee applies from 13% to 20% for 2012/13.

How will you ensure that taxpayers’ money is well spent and monitored?

  • Lenders are monitored by the Government’s agent, Capital for Enterprise Ltd and independent audits will assess lending behaviour under the scheme.

7. Premium collection

  • An annual premium of 2% of the outstanding loan balance is payable, assessed and collected quarterly in advance.

8. General queries

Which lenders already offer the EFG?

A full list of participating Lenders may be found on CFEL and BIS websites.

Where are borrowers to be directed if they are unhappy about the decision made a lender regarding the EFG?

All decision-making in relation to individual Enterprise Finance Guarantee (EFG) loans is delegated to the participating Lenders. Neither BIS nor CfEL can advise on individual eligibility queries. Nor will BIS or CfEL intervene in the commercial relationship between borrower and lender in the event of disputes. Customers dissatisfied with the experience of dealing with their bank should raise their concerns initially through the bank’s own customer complaints procedure.

If the matter is not resolved businesses with a turnover of under €2 million and fewer than ten employees have the option of taking their complaint to the Financial Ombudsman Service or on 0845 080 1800. Businesses may also wish to seek legal advice if there is a contractual dispute.

Alternatively customers always the option of seeking support from other Lenders.

Please note:

• There is no automatic entitlement to EFG-backed borrowing simply because a business believes that it satisfies the sector, turnover and loan term and value criteria.
• An EFG lender may not necessarily offer the full range of lending provided for under the EFG rules if to do so would not be compatible with their normal commercial lending practices.