Small Firms Loan Guarantee scheme - dealmaker or not?

The Small Firms Loan Guarantee (SFLG) is a UK-wide scheme offering unsecured business finance for small and medium-sized businesses that have been unable to raise finance in the conventional way due to lack of security.

Under the scheme, the government, through the Department of Trade and Industry (DTI), provides a guarantee on 75% of the loan value. However, it is important to remember even with this guarantee not all lenders will support the application. In addition, the business will remain liable for the whole amount of the outstanding loan.

A recent review changed the focus of the scheme to early stage small and medium-sized enterprises with a turn over of less than £5.6 million per year. Those businesses that qualify can borrow up to £250,000 with lending terms of up to 10 years.

The application process

An application form can be obtained from any of the 23 approved high street banks and specialist commercial lenders. It will also be necessary to present a clear and comprehensive business plan with full financial forecasts, covering profit and loss, cashflow and balance sheet positions over a three-year period. In addition, you will need to ensure you have a deposit (typically 30-50%) to contribute towards the total funds you are trying to raise.

If you do not have adequate security for conventional lending, you may be eligible for the SFLG scheme. However, if you have assets that a bank could use as security – either personal or business – but are unwilling for them to be utilised, you will not qualify to use the SFLG scheme.

Once your application has been put forward the lender will complete their normal underwriting criteria. The lender must be convinced that there is a clear repayment capability, and this will need to be clearly set out in your business plan.

If your business has already borrowed money under the SFLG scheme you can apply to borrow a further amount, so long as you ensure your total does not exceed the limit. Additionally, it is necessary to make the lender aware of any previous SFLG loans approved from other businesses you are involved in.

What happens once the loan is approved?

Once the loan has been approved you must take up the loan offer within six months of the date the loan is guaranteed.

The loan is usually paid out in one amount. However, the lender may decide to pay the loan in up to four stages. Each of these payments will comprise of at least 10% of the total loan, with the full amount paid out within two years.

Loan repayments are taken each quarter by direct debit. As well as repaying the amount of the loan, you will also need to budget for additional interest rate charges. These rates vary between lenders and are negotiated between the lender and the borrower. However, the lenders decision on the applicable loan rate will be based on their assessment of the risk involved in lending to your business. In addition, the DTI charges a 2% premium on the loan, which is payable on a quarterly basis.

Contact us to find out more about how The Diverse Finance Company can help you raise unsecured business finance or take advantage of other business finance solutions.

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