Coronavirus Business Support Package- Key lessons to be learned from the 2008 EFG


20 Mar
20Mar

In 2008 the Government launched the Enterprise Finance Guarantee (EFG). 

There are important lessons to be learned from how this Government scheme was implemented for the latest Coronavirus business interruption support package announced on 17th March and updated on 20th March.

The EFG was a scheme designed to help small and medium sized businesses (SMEs) out of trouble following the financial crash. It was set up to support bank loans of between £1,000 and £1 million aimed at helping smaller viable businesses who may be struggling to secure finance. 

Since its launch, over £3.3billion of EFG finance has been provided by the lending banks to more than 35,000 small to SMEs. 

Under EFG, the participating banks had to confirm the following before extending loans:

  • the applicant’s plans were viable and would meet usual commercial requirements for a loan; and
  • the banks would be happy to lend to the applicant and that all the applicant’s available collateral has been exhausted.

EFG loans could be used to refinance existing overdraft borrowing (current utilisation not the limit). The lending banks had to continue to make available an appropriate working capital facility following the refinance and it was not permissible to use EFG finance to simply terminate all existing overdraft debt and not provide working capital finance.

SMEs with a sound borrowing plan, but with insufficient security to otherwise obtain a bank loan were eligible to apply for support under EFG. 

The EFG's terms meant that the lending banks were provided with a government-backed guarantee of up to 75% of the value of the loan made to an SME. [The C-19 business interruption loan guarantee announced on 20th March 2020 is for 80% of the loan value made by the lenders to eligible businesses.] 

But the key component was that the SME itself would be liable to repay 100% of the loan, plus a 2% annual guarantee fee to the Government for providing the support. [Although the Government is not charging any guarantee fees this time, crucially, it looks like the same principle will apply and that borrowers will remain liable for 100% of the loans taken under the C-19 support package. So, businesses must be aware that they do carry a full loan repayment risk, even though the lenders can claim back from the Government 80% of loans defaulted on.]

In other words, the Government's guarantee was to the lending banks only and not to the SME borrowers. [This principle remains for the C-19 support guarantee scheme.]

There was another very important provision to the EFG, which was that the Government guarantee only permitted the lending banks to claim up to 13% of the total amount they had lent to SMEs. [For C-19 support, the Government guarantee is limited to 80% of loans up £5m in value to each business.]

Therefore, only 9.75% of the total loan portfolio was recoverable from the Government under scheme (i.e. 75% of the value of loans made until ceiling of 13% is reached = 9.75% total amount recoverable). This meant that banks had to exercise virtually their normal lending criteria as they were in fact assuming the vast majority of the loan risk themselves.  [The maximum that can be claimed by lenders under the guarantee will be limited to £4m per business (i.e. 80% of £5m). It is not known yet if there are any other limits to be imposed.]

The trouble with the EFG :

Although many EFG loans have successfully helped SMEs, there are claims of mis-selling of the scheme. 

Largely, these claims are about SMEs being subject to onerous charges or unexpected liabilities, which could otherwise have been avoided. The claims revolve around two features of the way these loans were promoted and administered, it's alleged that many banks operating the EFG scheme: 

1. Failed to explain to their SME customers that they would remain liable to repay the banks 100% of their EFG supported loan, not just the 25% that was not being guaranteed by the Government; 

2. Insisted on taking additional loan security from their customers to include their family homes, in direct contravention of the terms of the EFG scheme;

That the EFG's terms were abused by some banks is seemingly not in question and it has left many SMEs, and their owners and directors, ruing the day they applied for and signed up for the lending facilities supported by the Government. 

There are plenty of articles and blogs online that testify to the hidden risks of EFG loans and some are given below for interest. 

https://www.icaew.com/technical/pba-community/trusted-adviser-services/efg-beware-the-hidden-truths 

https://www.allsquare.co.uk/financial-news/rbs-and-a-new-year-same-old-same-old-enterprise-finance-guarantee-loan-mis-selling/ 

https://www.ellisjones.co.uk/blog/article/missold-enterprise-finance-guarantee-loans-avenues-for-redress 

http://www.cornmillassociates.co.uk/so-what-is-this-outrage-about-rbs-and-efg-loans-about/ 

https://senecabanking.co.uk/the-mis-selling-of-efg-loans-has-put-the-banks-under-scrutiny-once-again/

What is needed now for the C-19 business interruption loan scheme?:

  • Much greater clarity on the rules of application and engagement for businesses than was the case for EFG;
  • Specific provisions against mis-selling of loans and a compulsory disclosure requirement by lenders of Government guarantee terms;
  • A requirement, under penalty for their non-compliance, for lenders and their employees and agents to strictly comply with those rules so that SMEs don't get caught out in the same as they did in the EFG, or in any other, way. 

Coronavirus Business Interruption Loan Scheme (commencing on 23rd March 2020):

  • Government to guarantee 80% of each loan made under scheme 
  • Guarantee to apply to loans up to £5m in value
  • Businesses to pay no interest for first 12 months 
  • Government will pay the interest charged by lenders for first 12 months
  • There will be a per-lender cap on claims under the guarantee
  • No fees to be charged by Government for providing the guarantee either to banks or customers
  • There are 40 accredited lenders in all
  • Applies to:
    • UK based businesses with a turnover of no more than £45 million per year
    • businesses meeting the other British Business Bank eligibility criteria

By the publications team at: Contracts-Direct.com

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