Memorandum by the Department for Business,
Enterprise and Regulatory Reform
1. PURPOSE OF
MEMORANDUM
1.1 To inform the Business and Enterprise
Committee about the Government's Enterprise Finance Guarantee
scheme and progress to date.
2. BACKGROUND
CONTEXT: THE
LENDING MARKET
2.1 The Government's approach to bank lending
has been to: establish stability in the financial system; create
the capacity for banks to resume lending; and support the recovery
of the economy. The Government's focus, through the bank recapitalisation
programme and the introduction of the Credit Guarantee and Asset
Protection Schemes, has been to ensure first that the banks have
sufficient capital, funding and liquidity and secondly that they
utilise this to lend to individuals and businesses. The main UK
banks have also committed to increase their lending to make up
for the withdrawal of foreign banks from the UK and the reduced
capacity of the smaller banks to lend.
2.2 The banking system lends £590 billion
to businesses in the UK, of which approximately £120 billion
is to small and medium sized enterprises (SMEs) with an annual
turnover of less than £25 million. Figures from the British
Bankers Association (March 2009) show that the stock of lending
to companies with turnover of less than £1 million is £55
billion.
2.3 Government has secured binding agreements
to expand availability of credit with Lloyds Banking Group (an
additional £3 billion in gross mortgage lending and £11
billion in net business lending over 12 months from March 2009)
and Royal Bank of Scotland (an additional £9 billion in net
mortgage lending and £16 billion in net business lending
over the 12 months from March 2009). In addition, major UK banks
whose capital and balance sheets are not directly supported by
the Government have also made public lending commitments. For
example, Barclays announced £11 billion of additional lending,
to be split equally between mortgage and business lending, while
HSBC has allocated £1 billion of its global working capital
fund to UK business. This means around £50 billion in additional
lending by the main banks above their 2008 levels of lending.
2.4 The Government monitors lending regularly
and has established a Lending Panel of the major banks and Ministers
to monitor the flow of lending and recommend action to increase
lending where necessary. The Government remains aware of issues
around the terms of lending, and specifically the fees set by
banks, but this issue is not discussed further in this Memorandum.
2.5 These overarching measures to repair
the banking system are designed to ensure appropriate lending
to businesses on commercial terms: it is not Government policy,
and nor would it be viable, for Government to substitute for commercial
bank lending. Viable businesses should get the financing they
need from commercial loans without direct Government support.
However, the Government recognised that certain market failures
persist, meaning some viable businesses are struggling to secure
the finance they need through normal, commercial lending, and
has therefore introduced a number of targeted schemes tailored
to meet those specific failures. The Enterprise Finance Guarantee
is one of these schemes.
3. THE ENTERPRISE
FINANCE GUARANTEE
(EFG) SCHEME
3.1 The Enterprise Finance Guarantee (EFG)
is designed to operate at the margins of banks' normal lending
activity to SMEs, allowing lenders to provide additional loans.
The scheme supports viable companies that are at the margins of
commercial lending because they have insufficient security or
their proposal involves a higher risk of loss at default. It exists
to help viable businesses during an unprecedented period of tightened
credit conditions, and is not designed for the majority of viable
businesses to whom banks should lend; nor is it intended for businesses
who are not viable and that banks are rejecting on that basis.
Instead it is targeted at a "grey area" between these
two segments: where the business has a long term future but, particularly
in the current economic conditions, is judged too high a risk
for normal commercial lending, and where a lender would be prepared
to take some risk of loss if that risk is also shared with the
Government.
3.2 EFG will therefore only ever account for
a small proportion of bank lending: it currently represents between
1% and 2% of the total amount of money lent to SMEs in the UK,
providing £1 billion of loan guarantees to enable banks to
lend up to £1.3 billion[1] to businesses with turnover of
less than £25 million. The scheme will run until March 2010.
Lenders have to demonstrate that EFG loans are additional to normal
commercial lending.
3.3 Businesses with an annual turnover of
up to £25 million[2] can apply for loans from £1,000
to £1 million, which is repayable over a period of between
three months to 10 years, although certain sectoral restrictions
apply (see 3.15 and 3.16 below). EFG can be used to support:
— New term loans with terms of between
three months and 10 years.
— Existing lending which may be refinanced
where the loan is at risk due to the deteriorating value of security.
— The conversion of part or all of an existing
overdraft into term loan to release capacity in overdraft to meet
working capital requirements.
3.4 A flow chart showing how a business
applies for an EFG loan is at Annex A.
3.5 The "additionality" that lenders
are required to demonstrate is important because it is not appropriate
for Government to act as a substitute for banks' normal commercial
lending. The Government looks to the lender to apply commercial
rigours to lending decisions and to obtain collateral security
from the borrower where appropriate. In guaranteeing the loan,
the taxpayer is taking a risk. It is therefore right that the
risk is shared by the lender and the borrower, as it would be
for a normal commercial loan.
3.6 The Guarantee provides the lender with
a 75% guarantee on individual loans. However, the Government's
exposure to liabilities under EFG is limited to a default rate
of 13% of the lender's total portfolio[3]. 13% is the maximum
default rate for a guarantee scheme in order to ensure compliance
with EU State Aid rules. The overall cap on the level of liability
Government takes on the scheme ensures that taxpayers' money is
not used to support artificially failing businesses and that banks
do not withdraw financing from businesses that are fundamentally
viable in the longer term. It would undermine both the banking
system and productive entrepreneurial activity if the Government
were to take risk that banks and entrepreneurs ought to be taking
themselves.
3.7 For guaranteeing up to 75% of each loan,
the Government requires from the borrower a premium which is set
at 2% per annum. This rate being the standard market price for
premiums was agreed after consultation with the banks. There is
a 25% discount this year: for all premiums due and successfully
collected during 2009 the rate is 1.5%. This premium will be on
top of the fees charged by the lenders in line with their normal
commercial lending practices.
3.8 Table showing the major differences
between SFLG & EFG.
|
| SFLG
| EFG |
|
| Driver/purpose behind scheme | To address long standing problem for SMEs without collateral and insufficient personal security
| Targeted intervention for viable SMEs, close to the margins on risk, who cannot access debt finance during times of tight credit conditions.
|
| SME Eligibility | SMEs with turnover <£5.6 million
| SMEs with turnover <£25 million |
| Size of eligible loans | £5k to £250k
| £1k to £1 million |
| Structure | New loans for working capital purposes could not be used to convert existing overdraft borrowing to loan
| Can convert part or all of existing borrowing on overdraft, provided additional new lending granted, for working capital purposes.
|
|
Sectoral restrictions
3.15 When the scheme was launched it had the same sectoral
restrictions as the Small Firms Loan Guarantee scheme (SFLG).
BERR has recently reviewed the sectoral restrictions in light
of changes in state aid rules and with a view to making EFG open
to as many viable businesses as possible. Since 1 March 2009,
a further 300,000 businesses have been eligible for EFG. EFG is
now open, amongst others, to tied public houses, medical and health
services provided by the private or independent sectors, and businesses
in the steel and shipbuilding sectors.
3.16 Partial restrictions remain, eg in agriculture, transport
and aid for financing export orders (in line with EU de-minimis
state aid rules), for banking, finance and associated services
(under the Industrial Development Act 1982) and for formal education
(for policy reasons). Businesses in the coal (EU de-minimis rules)
and insurance sectors (IDA), and publicly owned bodies (for policy
reasons), remain excluded. Lenders will advise businesses if any
sectoral restrictions affect the business when considering loan
applications.
Personal guarantees
3.17 In the guarantee scheme, the Government looks to
lenders to apply commercial rigours to lending decisions, including
obtaining collateral security from the borrower where appropriate,
although excluding primary personal homes given the current economic
situation. Almost all small firm lending, whether or not it is
under the guarantee scheme, has some form of security provided
for it. If tangible security is not available or is insufficient
at the time of borrowing then an unsupported personal guarantee,
excluding primary personal homes, may be accepted, allowing assets
built up to be pursued in those circumstances where a loan defaults.
When personal guarantees are asked for, this is recognising that
risk is shared between the bank, the business and, with a Government
guarantee, the taxpayer.
3.18 The Government decided on the basis of consultation with
banks and small business organisations that lenders could be entitled
to ask for personal guarantees, as the scope of the EFG intervention
is wider than the previous Small Firms Loan Guarantee Scheme and
should be consistent with commercial banking practice: it would
be wrong for Government to take on risks that entrepreneurs themselves
are not prepared to take despite their having personal assets
that enable them to provide such a guarantee.
3.19 Since the introduction of the EFG, the Government
issued a clarification on 19 February to make it clear that banks
should not directly take the principle private residence as security
against a Government backed loan. The Government is monitoring
the situation to ensure appropriate behaviour by the banks and
will look carefully at any case submitted by an SME or Member
of Parliament on behalf of a business where banks appear to have
asked to take the principle private residence as new security
for a new EFG loan.
Delivery and distribution of EFG
3.20 There are now 26 lenders taking part in the EFG
(list at Annex B), of which 21 have already made some loans. Capital
for Enterprise Limited, are responsible for the accreditation
and monitoring of lenders on behalf of the Secretary of State.
3.21 All decision-making in relation to the use of EFG in
connection with individual loans is delegated to the lenders.
Lenders should continue to apply their normal commercial checks:
the use of EFG will only be contemplated by the lender once they
have established that the borrowing proposition satisfies their
normal commercial criteria.
Promotion and awareness
EFG lenders
3.22 After EFG was introduced BERR invested in a mystery
shopper exercise of main lenders and found that over 75% of those
surveyed had a good awareness of the EFG. The mystery shopper
exercise was carried out at after six weeks of the scheme; further
improvement can therefore be expected since this was conducted.
Following this exercise, the Government committed to work closely
with the EFG lenders to improve the consistency of understanding
about the more detailed aspects of the EFG—for example,
in particular in respect to personal guarantees. All the main
banks have agreed to develop action plans to increase knowledge
and application of EFG amongst its frontline staff, and we are
monitoring these closely.
SMEs
3.23 The February BERR SME survey shows 40% of SME employers
were aware of Government guaranteed loans being available from
the banks (this survey was carried out around four weeks after
the scheme's launch). The next survey will be carried out next
month.
3.24 The scheme has received considerable publicity in the
media since its launch in January. It has also been widely promoted
to the private sector via:
— Full page adverts in national press.
— Weekly delivery updates.
— The Federation of Small Businesses.
3.25 The work to promote awareness of the range of support
available will continue.
EFG Progress data provided by Capital for Enterprise Limited
as of 27 May 2009
3.26 An EFG web portal, provided by BERR and managed
by Capital for Enterprise Limited, enables the lender to manage
the EFG-specific elements of individual loans from the initial
eligibility check throughout its lifecycle. Most recent data (as
of 27 May) from the web portal is set out below.
3.27 The cumulative total of cases entered on the web portal
is 4,248.
3.28 Cumulative total number of loans which are eligible,
offered and drawn[4]
|
| No eligible | 3,811
| Value | £423 million
|
| No offers | 2,668
| Value | £251 million
|
| No drawn | 1,705
| Value | £154 million
|
|
This rate of usage indicates the scheme will meet its target
of guaranteeing up to £1.3 billion by the end of March 2010.
3.29 Loans offered to business by turnover
Of 2,668 EFG loan offers:
— 70% were to businesses with turnover up to £1
million.
— 28% were to businesses with turnover of £1 million-£10
million.
— 2% were to businesses with turnover of £10 million-£25
million.
3.30 Number of loans offered to businesses by size of
loan
|
| Less than £25,000 | 520
|
| Between £25,001 to £50,000 | 745
|
| Between £50,001 to £100,000 | 689
|
| Between £100,001 to £250,000 |
544 |
| Between £250,001 to £500,000 |
123 |
| Between £500,001 to £1,000,000 |
47 |
| Total | 2,668
|
|
3.31 Number of offers made by region:
|
| | No
| Ratio: No of EFG new loans
offered per 10,000 businesses[5]
|
|
| South East | 413
| 5.2 |
| East of England | 342
| 6.3 |
| London | 307
| 3.9 |
| South West | 299
| 6.7 |
| North West | 286
| 6.2 |
| West Midlands | 257
| 6.5 |
| East Midlands | 169
| 4.9 |
| Scotland | 174
| 5.4 |
| Yorkshire & Humber | 160
| 4.3 |
| Wales | 146
| 6.9 |
| North East | 98
| 7.2 |
| Northern Ireland | 17
| 0.9 |
| Total | 2,668
| — |
|
3.32 Number of days taken between eligible and offered
loans
|
| No of days taken from "Eligible" to "Offered"
| % |
|
| Same day | 41
|
| 1-7 | 44 |
| 8-14 | 7 |
| 15-21 | 3 |
| 22-28 | 2 |
| 29-35 | 1 |
| 36-42 | 1 |
| 43+ | 1 |
|
3.33 The figures above show that it takes up to a week
for the majority of loans to be processed from "eligible"
to "offered" status, consistent with approval time for
a normal bank loan. Participating lenders will update this portal
at different stages, depending on their own internal and different
lending procedures and processes which can affect when data is
inputted on the portal. There should be no additional delay for
a company to have an EFG-backed loan instead of a normal loan,
as this only requires the company to answer three or four additional
questions as part of their normal loan applications. However anecdotal
evidence was raised in the small finance forum that one or two
banks were applying an additional screening (and consequent delay)
for loan applications under the scheme. We have investigated this
with the banks concerned and are working with them to streamline
their processes. We will continue to review process times with
a view to seeking reductions wherever possible.
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