Shaking up the Small Firms Loan Guarantee scheme

The Small Firms Loan Guarantee (SFLG) is a government-backed scheme that provides an alternative route for small and medium-sized enterprises (SMEs) to obtain funding from a number of approved banks and lenders if they lack security.

In operation since 1981, the scheme has provided more than 88,000 loans to small businesses since its launch. However, following a comprehensive government review, a number of changes to the scheme were bought into force in December 2005.

Although it was widely predicted that the scheme would be scrapped, the review, carried out by Teresa Graham, found that a scheme providing unsecured business finance was needed by small firms more than ever and set out a number of recommendations to maximise the support the scheme offers to small firms.

This article examines the changes made to the scheme as a result of the review and discusses how these changes will benefit SMEs.

Benefiting businesses

The Graham Review made 38 recommendations to modernise and grow the scheme in the small business community. In addition, the recommendations aim to reduce the amount of red tape surrounding the scheme to make it easier for smaller firms to apply.

Significant changes to the scheme will enhance the support provided to start ups and early stage businesses and simplify the eligibility criteria for these enterprises. In addition, current “inconsistencies” in allocation of the loans are to be eliminated and the overall application process is to be simplified.

Research has shown that start up and early stage enterprises traditionally lack collateral and have access to fewer finance options than larger businesses. Therefore, one of the key changes to the scheme is the realigning of its focus to provide funding specifically for these young businesses. Therefore, only those businesses that have been trading for five years or less are now eligible for finance under the scheme.

The amount that can be borrowed by SMEs has also been increased to £250,000. Previously, businesses under two years old were only eligible to apply for up to £100,000, however, this was felt to be too restrictive for high-growth businesses.

In addition, a number of measures have been introduced to make the eligibility criteria more straightforward, including:

• The cap on the maximum number of employees (previously 250) has been removed.
• The turnover limit has been increased from £3 million (£5 million for manufacturing businesses) to £5.6 million.
• Restrictions on the maximum amount of SFLG scheme lending to individuals have been removed meaning lending decisions will be based on each individual business case rather than the previous SFLG lending history of those connected with the business.

Simplifying the application procedure

Prior to the implementation of the recommendations of the Graham Review, there was a large amount of red tape surrounding application for finance through the scheme. In particular, lenders approached funding on a case-by-case basis and were required to gain prior approval from the Department of Trade and Industry’s (DTI) Small Business Service (SBS) for loans above £30,000 (this had been increased to £50,000 in 2005), which resulted in delays in approving loans for eligible businesses.

As a result of the review, lenders now have the autonomy to approve all loans without seeking approval from SBS, and a web portal has been created to assist lenders in determining eligibility for the scheme. In addition, the scheme is moving towards a ‘portfolio’ approach where lenders have a capped amount that they can lend through the scheme.

Inconsistencies in the delivery of the scheme by lenders were found to be a source of frustration for small businesses. The review found that there were discrepancies in the way the scheme was being delivered at both a regional and local level, with cases of businesses being turned down for the loan at one branch but being accepted at another reported.

To help combat this, a number of measure have been introduced to iron out these inconsistencies, including the introduction of incentives for lenders to increase usage of the scheme and increased monitoring of lenders at both regional and local levels to ensure they are promoting the scheme.

The changes made to the Small Firms Loan Guarantee scheme are expected to create a lending system that is fairer to those early stage businesses that require this type of funding the most, as well as making the application and awarding process more transparent. Still in its early stages, it remains to be seen whether these changes will have the desired impact.

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

Copyright © 2006 The Diverse Finance Company

copyright © 2005 Diverse Finance Ltd. All Rights Reserved.