Unsecured business finance (Small Firms Loan Guarantee scheme) FAQs
What is unsecured business finance?
What is the Small Firms Loan Guarantee scheme?
What can the loan be used for?
Who can I approach for funding through the scheme?
What are the qualifying criteria?
Will there be any additional charges?
Can I apply for funding more than once?
How long will it take for the funds to become available?
What happens if I’ve got a poor credit history?
What is unsecured finance?
If your business has been turned down for a commercial loan or mortgage because it doesn’t have assets that can be used as security, such as commercial or residential property, you may be eligible to apply for unsecured business finance. This can take the form of grants and support schemes offered by local authorities, the government or the EU.
What is the Small Firms Loan Guarantee scheme?
The Small Firms Loan Guarantee (SFLG) scheme provides an alternative route for small and medium-sized enterprises (SMEs) to obtain funding from a number of banks. It was launched by the Department of Trade and Industry (DTI) in 1981 to provide finance for those small businesses that don’t have access to assets that could be used as security for traditional business bank borrowing.
The scheme is operated through 23 high street and business banks and specialist lenders with the DTI providing a guarantee on 75% of the loan value. However, it is important to be aware that there is still no guarantee that the bank or commercial lender will be motivated to support your application.
A comprehensive review of the scheme in 2004 saw a number of changes made to the scheme at the end of 2005. These were designed to make it simpler for smaller businesses and start ups to access funding through the scheme.
What can the loan be used for?
Loans through the SFLG scheme must be used for business development. This includes:
• Start up trading
• Improving efficiency
• Financing a project
• Business expansion
• Leasing premises or purchase of equipment
However, there are a number of restrictions on how the loan can be used. For example you can’t use funding through the scheme to:
• Buy a company’s shares
• Buy out members of a partnership
• Replace an existing loan or overdraft facility
• Finance interest payments
• Start exporting
How much can I raise?
A loan of between £5,000 and £250,000 is available through the scheme.
Who can I approach for funding through the scheme?
Most of the major business banks, including Barclays, HSBC, Lloyds TSB, NatWest and the Royal Bank of Scotland currently participate in the scheme. In all, 23 high street business banks and other commercial lenders accept applications from small businesses through the scheme. It is hoped that other lenders will be encouraged to participate in the scheme as the effects of the recent changes become more apparent.
What are the qualifying criteria?
There is a wide range of qualifying criteria that you will need to be aware of when applying for funding through the scheme. Eligibility is restricted to those businesses that have been operating for less than five years and those with a turn over of less than £5.6 million per year.
In addition, you are required to contribute some of your own funds (usually 30-50% of the amount required), and it is also necessary to have a comprehensive business plan in place. This will need to include a full three-year financial forecast comprising of profit and loss, a balance sheet and cashflow forecasts.
While your bank may be able to guide you through the application process, it may pay to gain additional advice and guidance from an independent adviser. Your adviser should have up-to-date information on the qualifying criteria and should be able to guide you in the preparation of your business plan to maximise the chances of your application being successful.
Are there any restrictions on who can apply?
Certain business sectors are ineligible for funding through the scheme and there are restrictions in place for some markets, for example on loans for the production, processing and marketing of agricultural products.
It is essential that you check any possible sectoral restrictions or eligibility criteria with your bank or independent adviser prior to starting the application process.
Will there be any additional charges?
The Department of Trade and Industry charges a 2% premium on the value of loan that is to be paid each quarter.
In addition, the bank or commercial lender you approach for finance through the scheme is able to set the amount of interest to be charged above the Bank of England’s base rate.
Can I apply for funding more than once?
It is possible to apply for funding through the scheme more than once. However, lenders will take into account any repayment issues with previous loans through the scheme and the success of your previous ventures before approving you for an additional amount.
How long will it take for the funds to become available?
Applying for the Small Firms Loan Guarantee scheme can be time consuming and, depending on how complicated your situation is, on average it can take anywhere from a few weeks to several months to complete the application and awarding process.
What happens if I’ve got a poor credit history?
Applicants with a less than perfect credit history can still qualify to raise finance through the scheme. Provided any adverse credit issues have been satisfied, and your current business is healthy and able to prove loan payment affordability, raising finance through the Small Firms Loan Guarantee scheme can still be a viable option.
Where do I go from here?
First of all, decide whether you want to apply and negotiate directly with the lenders yourself, or if you would prefer an independent intermediary to represent you.
It will then be necessary to prepare a comprehensive business plan that meets all the requirements for lending under the scheme, and you will also need to ensure your business can afford to meet the loan repayments.
The Diverse Finance Company, for example, can assist in the preparation of your business plan to meet the strict underwriting criteria expected by the banks and the DTI and can coach you through the scheme application process.
Starting out with the right advice and team on your side can mean the difference between successfully applying for funding through the Small Firms Loan Guarantee scheme and being turned down.
Copyright © 2006 The Diverse Finance Company
