Has the government Enterprise Finance Guarantee scheme provided vital Business Refinancing

The Small Firms Loan Guarantee Scheme (SFLG) was closed in January 2009 and replaced by the Enterprise Finance Guarantee scheme (EFGS). The aim of the EFGS (and indeed the SFLG before it) is to boost lending to small and medium sized businesses. Loans granted through the scheme are guaranteed by the government for up to 75% of the value of the loan. The company's directors will normally be required to personally guarantee the remaining 25%.

The current economic climate has of course left a number of small businesses struggling with cash flow and turning to their banks for support. In this climate, initiatives such as EFGS are therefore very welcome. There is some evidence that the scheme has had a positive effect and lending to small firms is increasing. A recent report published by the Department for Business, Innovation and Skills showed in the year up until the 3rd April 2009 that 2,360 loan guarantees worth GBP177.8m had been issued in total under both the Small Firms Loan Guarantee Scheme and the Enterprise Finance Guarantee scheme. This was substantially less than the GBP205M guaranteed in the previous year. They are also far below the scheme's GBP360m budget set by the Government in March 2008. The Federation of Small Businesses conducted research that suggests that more small businesses are experiencing declining rather than improving bank support and the cost of loans and overdrafts remains restrictive. Therefore it does seem that small businesses struggling with cash flow which had high hopes of being eligible for loans under the EFGS when it was launched are missing out.

Of course it is not sensible for any bank to lend to a business which is not viable. In the current turbulent economic times, businesses in need of finance may be turned down as banks are concerned that the business is not viable and will therefore default on the loan. Banks will naturally want to ensure that a business can generate sufficient income to repay any borrowing. This could include looking at the company's customers, order book and management accounts.

A bank is obviously going to decline to loan if the the business is not generating enough income to meet its current commitments. However, many small businesses are having loan applications turned down even though the business case stacks up. It seems as though although banks are under pressure to lend, they are adopting a policy of targeting the most profitable businesses on their books, many of which do not necessarily need finance.

There is an argument that the enterprise finance guarantee scheme has been hampered by poor communication and the failure of branch managers to advertise or offer it. If more bank managers are made aware of the details of the scheme and the 75% guarantee from the government, perhaps this would reduce their reluctance to lend. Nevertheless, the fact remains that targets for the volume of lending are not being met. It is the responsibility of banks to ensure that their employees are made aware of the EFGS and how it can help protect their interests. However, more than this, perhaps the banks need to start to change their attitudes in terms of which businesses present viable lending propositions. Unfortunately the current definition of viable seems to remain a mystery.

In the meanwhile, in the face of this problem, business owners are well advised to consider alternative options for raising finance. Business refinancing can help in this area. Business refinancing generally involves raising cash secured against tangible business assets thus giving the bank real security and the comfort required to release funds.