‘Do legal homework’ warning on EFG scheme

SMALL businesses applying for the Government’s Enterprise Finance Guarantee scheme are being urged to ‘do their homework’, with many unaware of Government terms which are forcing the banks to impose stiff assessment criteria.

The Government launched the EFG scheme in January to help small firms access funding. Under the scheme, the loan still comes from the bank but the Government underwrites 75 % of it, supposedly to reduce the risk to the bank and encourage lending.

But banks are still applying rigorous assessments to EFG applications and remain cautious about lending.

That’s because despite the Government guarantee, each bank is subject to an overall limit on recovery under the scheme, which is nearer to 10% of all of its EFG loans.

According to the Department of Business, Enterprise and Regulatory Reform, 2,059 small firms have been offered loans collectively worth £186m under the scheme – a fraction of the planned £1bn of guarantees to support to £1.3bn of bank lending by March 2010.

Mke Yardley, corporate partner at law firm Mace & Jones said businesses can easily fail to win approval.

“It is critical businesses do their homework and prepare the business for careful investigation by the bank,” he said.

“This fund is aimed at businesses with cash flow problems. Whilst cash flow problems may be expected, other matters, such as problems with employees, property and commercial disputes and weak terms and conditions of supply, may cause the bank legitimate concerns.”