Anyone understand the Enterprise Finance Guarantee scheme?

Banks and SMEs may both be in the dark about the Government's much-vaunted lending stimulus plan...

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Last Updated: 31 Aug 2010

The Government's Enterprise Finance Guarantee scheme, which was unveiled in January, was supposed to make life easier for small businesses by freeing up as much as £1.3bn in bank loans. The problem is, people don't seem to understand how it works. According to a poll released today by the Forum for Private Business, 54% of its members think there is too little information about the scheme; while a third says the process is too bureaucratic. Worse still, one in five reckons that even the banks don't understand it...

The EFG (which has replaced the Small Firms Loan Guarantee scheme) is intended to guarantee loans of between £1,000 and £1m to businesses with a turnover of less than £25m - the idea being that by back-stopping the banks' potential losses (and thus reducing their risk), the Government would enable banks to dole out more cash to firms that were basically healthy, but struggling to get access to working capital in the current climate. However, judging by this FPB poll, most of the prospective recipients don't know how the scheme works, and don't know how to take advantage of it. And although the Government insists that delivery of the scheme ‘is fully delegated to the participating lenders’ (of whom there are currently 26), SMEs clearly don’t trust their bank managers to do it for them.

In fact, some argue that the EFG could actually do more harm than good to their relationship with their bank. One in four is worried that by applying for funding from the scheme, they’d effectively be admitting to their bank that their financial position is perilous – which could lead to demands for extra security, higher fees, or even a withdrawal of their existing arrangement. In other words, a scheme that was supposed to give businesses easier access to finance may actually be having precisely the opposite effect.

What's abundantly clear is that whatever the EFG was supposed to do, it's not really working (and the same goes for the various interest rate cuts and other Government stimuli). In the FPB's latest poll, not a single respondent felt they were getting more support from their bank, while 94% have seen no improvement whatsoever in their borrowing terms. On average, the banks are charging 5.6% above the base rate, with one poor soul reporting that his overdraft rate has jumped from 3 to 7% above base. A British Chambers of Commerce report out this morning paints a similar story.

There’s not much point having a loan guarantee scheme that most people don’t understand, and the rest are too afraid of using. The Treasury’s scattergun approach to this crisis has already been called into question; clearly it needs to work harder at implementing its previous bright ideas before it starts dreaming up new ones.... 

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