On paper, the Enterprise Finance Guarantee (EFG) scheme is a simple and easy way for the government to support British SMEs. By acting – through the British Business Bank – as a partial guarantor for loans to UK businesses that are asset-poor, but still viable, it means that up to 75% of bank loans between £1,000 and £1.2 million are eligible for the EFG.
Originally launched in 2009, the EFG has been available from most of the main banks as part of a wider plan to facilitate lending to viable small businesses that have been turned down for a standard commercial loan. It is also designed to allow more first-time business owners and entrepreneurs to apply for bank-approved loans. It’s a great idea and a solid initiative, but a recent review of the EFG’s strategic and operational capabilities revealed that it is not working as intended.
Whilst the British Business Bank’s managing director of lending solutions, Judith Ozcan, has said the EFG has supported the provision of more than £2.7 billion of finance to more than 25,000 smaller businesses in the UK, only 1,835 enterprises received this kind of loan in 2015, and just 446 in the last quarter. Moreover, the number has continued to fall year-on-year since the high of 2009 when, between April and June, over two thousand loans were drawn at a value of £201.6 million.
So, despite good intentions, startups and SMEs have continued to struggle to find the right business lenders. However, solutions have slowly been emerging.
Following numerous calls for a bank referral system – whereby businesses turned down by banks would be recommended to alternative finance providers – the All Party Parliamentary Group for FinTech’s latest report suggests that this might be implemented soon.
Moreover, the EFG’s accreditation process has now been reopened, so it’s not just banks acting as providers. Instead, alternative finance companies will be able to offer EFG-supported lending to SMEs. This is a significant addition to the landscape as it significantly improves the tools available to small businesses and startups in terms of funding, and further acknowledges the benefits of nascent lenders within the financial industry.
Along with the rising interest in financial technology and digitally enabled finance platforms, alternative lenders and new funding initiatives have seen huge growth in the last few years. Filling in the space where banks traditionally sat – lending to smaller businesses and startups – they use technology to understand their potential clients better and create bespoke solutions for them. Ranging from peer-to-peer loans to crowdfunding, not only are there more products available, but the companies providing them are nimbler than traditional lenders, able to process more companies at a faster rate and to offer emergency cash injections with less risk. With the government further bolstering this offering through the EFG, the diversity of accredited specialists should allow more SMEs to thrive, especially once the referral network bridges the gap between alternative lenders and banks.
Of course, there are other loans and finance options available for SMEs outside of the EFG that are already supported by the government. One such example is the Start Up Loan Company, which funds loans of up to £25,000, and also offers mentoring and advice.
It is also possible to use invoice finance to provide immediate working capital, as an alternative to bank loans and overdrafts. For those that aren’t familiar with invoice finance, it generally involves debt factoring or invoice discounting. The former is good for immediate needs as it releases the money tied up in invoices, whereas the latter works by drawing money against the invoices so that a regular and predictable cash flow can be withdrawn.
In other words, there are far more options than ever before when it comes to SME and startup funding. While customer-first alternatives are taking over from traditional banks, small businesses still need to be made aware of all that is now on offer. The expanding of the EFG is a step to support this education, bolstering the rise of alternative finance, and in turn empowering those businesses that are ultimately the lifeblood of the UK economy.