Enterprise finance guarantee

Definition

Enterprise finance guarantee (EFG) is a financial scheme introduced to help small and medium enterprises (SMEs) that struggle to secure traditional bank financing due to lack of collateral or no trading history. 

What is the enterprise finance guarantee?

EFG encourages banks and other lenders to provide loans to SMEs by offering a government-backed guarantee. This reduces the risk for the lender, making them more likely to extend credit to businesses that may not meet the usual lending criteria.

This scheme is available to SMEs across various sectors, including sole traders, partnerships, and limited companies, given they meet certain criteria. Generally, businesses must have a solid business plan and demonstrate the ability to repay the loan. They should also be unable to get funding on normal terms due to lack of collateral.

Under the EFG scheme, the government provides a guarantee to the lender for 75% of the loan amount. This means that in the event of default by the borrower, the government will repay the lender for up to 75% of the outstanding balance of the loan.

EFG loans are similar to traditional bank loans in terms of repayment schedules, interest rates, and loan amounts. However, the terms may vary. The maximum loan amount available under EFG is £1.2 million.

Borrowers are responsible for repaying the full amount of the loan according to the agreed terms. In the event of default, the lender can make a claim against the EFG guarantee to recover a portion of the outstanding debt. However, the borrower remains liable for any shortfall between the guaranteed amount and the total outstanding balance.

Example of the enterprise finance guarantee

John runs a small business that produces furniture. Despite having a solid business plan and steady sales, he struggles to secure a loan due to a lack of collateral. However, with the help of the EFG scheme, John’s bank agrees to provide him with a £100,000 loan to purchase new machinery and expand his operations.

Since the loan is backed by the government guarantee, the bank feels more confident in extending credit to John’s business. This allows John to invest in the equipment he needs to increase production capacity and meet growing customer demand.