The government announced the launch of the Enterprise Finance Guarantee Scheme (EFG) in November 2008 to provide targeted intervention for viable SMEs, close to the margins on risk, who could not access debt finance during times of tight credit conditions.
In his Pre-Budget Report, presented on 24 November 2008, the Chancellor announced a Small Business Finance Scheme.
The government offer to bear 75% of the risk of default on each eligible individual loan, subject to a cap on the total claims that may be made by each participating bank.
The scheme is open to businesses with an annual turnover of up to £41m, seeking loans of £1,000 to £1 million, repayable over a period of 3 months to 10 years.
State aid rules restrict or exclude businesses in certain industries such as agriculture, coal and transport.
The cost of the guarantees to the borrower is 2% per annum of the outstanding balance, collected quarterly, payable to BIS.
BIS are offering a discount of 25% (making the cost of guarantees 1.5% per annum) for all premiums successfully collected in 2009.
Under the EFG scheme the UK government, through its Department for Business, Innovation and Skills[1] (BIS) will guarantee 75% of any loans made, with the bank covering the remaining 25%.
The guarantees will mean that the government, or taxpayers, will pick up three-quarters of the tab for any bad loans for which a claim can be made.
However, lenders participating in the scheme cannot exceed claiming back more than 13% of the total amount lent under EFG.
The default rate on SFLG loans has been consistently high: In the year 2008/9 the total amount paid out by the Government to banks under the guarantees was £84.6m.