Many removal companies have suffered over recent years due to the recession. A lot of companies have cut back and may now be considering additional borrowing to grow their business as the house market is picking up. One loan the banks push to help borrowers is the Enterprise Financial Guarantee Scheme (EFGs). Here, Mike Smith, Director of Jameson Smith & Co, provides some advice.
The government introduced the EFG in 2008, replacing the Small Firms Loan Guarantee Scheme (SFLGS), with the aim of helping banks lend to those customers who had a viable business but insufficient security to secure borrowing. There are a number of restrictions, but basically the company needs to have less than £41m turnover - covering about 70% of SMEs.
If you haven’t got sufficient assets the scheme can appear attractive. Whilst the basic principle of the scheme is quite simple, in reality there are pitfalls for directors if the scheme is not properly understood. Since the scheme was first introduced there appears to have been a lot of confusion as to what the EFG did or did not provide for borrowers.
There are 5 key questions you must ask before you consider the EFG for your business:
1. Does the EFG protect me if my company becomes insolvent and has to liquidate?
Not in principle. The EFG is there to pay 75% of your EFG loan to the lender if your company becomes insolvent and cannot pay the bank, but you will be liable for the 100% of the loan via the personal guarantee.
2. Am I only liable for 25% of any EFG loan if my company fails?
No. You are liable for 100% of the loan via the personal guarantee signed. The bank will exhaust the normal process of pursuing you personally before it can make a claim from the EFG.
3. I have assets outside of my family home. Are these at risk?
Yes any assets outside the family home are at risk and can and will be pursued before a claim can be made against the EFG.
4. Can I lose my family home with the banking personal guarantee from the EFG loan?
No. To be absolutely clear the family home cannot be placed at risk with any EFG related loan.
However, this wouldn’t prevent the banks suggesting other payment arrangements like an individual voluntary arrangement (IVA) which may inadvertently put the home at risk as if the IVA fails the creditors will resort to bankruptcy and overriding the EFG protection.
5. Is the 2% premium I pay ‘insurance’ for my protection if my company fails?
No it actually goes to the government’s Department of Business Innovation and Skills to go towards funding the EFG scheme. The 2% helps the government underwrite the cost it has for the 75% guarantee to the lending bank should your company fail.
How it works in practice
I dealt with one case involving the director of a removal and storage company. A hard working husband and wife team, whose business was forced into liquidation due to the recession hitting the housing market in 2011.
They took out a £40,000 EFG loan in 2010, plus personal loans to keep the company afloat as the recession hit hard. They were told to pay the 2% premium by the bank so they could claim the 75% from the government if liquidation became a reality.
When they faced liquidation they did not expect to be pursued aggressively by the banks to recoup the full debt. The bank forced the director into an IVA. Once the IVA was in place the banks stopped hounding the director because the bank had proven they could go no further. But this ruined their credit rating for six years and put the family home at risk. So what looked like a manageable problem became a serious issue putting the family home at clear risk.
The lessons and warnings
So what should you look out for and what are the pitfalls when you need to raise funds to replace old vehicles and that old forklift, or simply improve cash-flow.
First - be suspicious of an unsolicited call from the bank ‘offering to lend a hand’. ’Helping’ is not the bank’s job – it is there to sell you more business products.
Second - you should be especially cautious about any ‘new' government scheme to reduce/take away your personal guarantees on business borrowing. Also be wary when pressured to convert an overdraft to an EFG loan – make sure there is a sufficient overdraft remaining to fund the business needs. If you are unsure, go to the government’s EFG website which is an excellent source of information at https://www.gov.uk/understanding-the-enterprise-finance-guarantee.
Third - the government introduced two key differences with the EFG compared with the SFLGS: Personal guarantees were allowed; and the banks could only claim a relatively small percentage of their overall commercial lending. This was to ensure the government was not inundated with the bank’s bad debts and the borrower had some stake in the game. The safeguard of course is the family home.
Whilst the government’s EFG scheme is in principle an excellent source of funding, it is managed in the ‘field’ by the banks that may misinterpret it. You must be aware of what you are signing and if, still in doubt, always seek help before you put pen to paper.
Mike Smith is Director of Jameson Smith & Co (http://www.companydebt.com/ ) a business debt specialist. Mike provides business turnaround and insolvency advice and solutions to UK directors and accountants.
Photo: Mike Smith
Click here to view the next Editor's pick