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UK-Flagship lending scheme under fire

Entrepreneurs have branded one of the government’s flagship lending plans for small businesses, the Enterprise Finance Guarantee Scheme (EFGS), a disappointment and a farce.

Confusion over the need for personal security guarantees has left many small and medium-sized enterprise (SME) owners questioning the fundamental value of the scheme devised by the Department of Business and Regulatory Reform (BERR).

Ben Way, founder and managing director of Rainmakers, a corporate ventures company, said: “We have tried to get on to the EFGS, but the whole thing is a farce.

“One of our companies just spent ages organising it, then had to give a personal guarantee at the end anyway.”

Since the scheme launched on January 14, £56m of EFG loans have been taken up by 750 SMEs, with half of the offers being made in the last three weeks.

But questions have been raised about what personal security is required to access the scheme.

In the course of applying online, Kevin Meagher, chief executive of Intamac, a security monitoring company, was informed that, “although banks are being actively discouraged from seeking personal guarantees under the EFGS, they may still do so if any of your current arrangements were provided on this basis”.

Yet, in a clarification note subsequently issued by BERR, the department stated: “If the lender deems the borrower to have no or insufficient security available, the EFG may be used.” However, the Co-operative Bank, Barclays and NatWest/RBS – all of which participate in the EFGS – confirmed they would still require personal security.

Further confusion has arisen over just how much of the loan is backed by the government. The scheme is described as having 75 per cent backing from the government, but this refers to each individual loan. The amount claimable by each lender in a “worst-case loss scenario” would be at “a net default rate of 13 per cent”, according to BERR. This translates as 9.75 per cent of the annual lending limit – leaving the banks with a 100 per cent exposure on their EFGS loans, after claims of 9.75 per cent of the total value of guaranteed lending made have been settled.

Meagher now asks: “Do we have a guarantee scheme that actually gives no supporting guarantees? Clearly, all directors have some assets and without offering them as security, they wouldn’t get funds under the scheme. In effect, what was a guarantee scheme to help businesses overcome problems and encourage lending is of no value.”

BERR said there was no reason why there should be any confusion. A spokesman said: “BERR’s policy on taking security has been clarified to all lenders and is in the public domain.”

But even the banks are unsure exactly how the scheme should be implemented. One relationship manager of a high street bank complained in an e-mail to an entrepreneur keen to access the EFGS that the initiative had been announced “without due consideration to the finite details of lending rules and criteria”.

*source-The Financial Times