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Tuesday, 17 March 2009

Enterprise Finance Guarantee Scheme: except its YOUR guarantee required

I make no apologies for returning to this theme again.

Amid much fanfare and rush to help small businesses, Mr Brown announced in January a new £1.3bn scheme to support SME's. This was called the Enterprise Finance Guarantee. Good name, must have taken a lot of advisors to think that one up.

Great news for many companies that could not access prime lending from their effectively bust banks, you may have thought.

I have spoken to dozens of people, accountants, directors and advisors. Not one has seen a company receive such a loan. The government insists some £30m per week is being advanced, but then we have to take any statement of this nature with some degree of scepticism.

After all, despite statements to the contrary, this money is ONLY AVAILABLE WITH PERSONAL GUARANTEES FROM DIRECTORS. Yes the banks get 75% of the loan underwritten by the Government, but the bank's are so risk averse they want 100% of the loan covered by PG's as well!

This is an extract from a BBC article online

Small businesses minister Shriti Vadera told BBC Radio 4's Money Box the government is on track to persuade the banks to loan the money it wants.

"We've now hit the rate that we need of eligible applications every week which means the scheme is completely on course," the minister said.

"We've currently got £115m of eligible applications, about £30m a week."

Nevertheless, a British Chamber of Commerce survey of 250 UK firms discovered 90% of those questioned did not know about it.

It only found one company which had actually been offered such a loan. Others who have been offered loans object to having to offer 100% directors' guarantees.

So the directors who have already taken huge risks to build up their companies, working 80 hours a week, forgoing family life, having probably already remortgaged their home, are now also expected to provide a PG secured against their properties.

Would you do that? Or would it be safer to see the company fail and start again?

One caller last week had actually been offered a loan on these terms but his wife refused to allow the security to be charged against her home. That company is now entering creditors voluntary liquidation. Little wonder.

So my message to prople looking at the EFG is this, don't get your hopes up, expect swingeing fees, and be prepared to lose your house. Enterprising scheme indeed.

UPDATE 23rd March

Sunday Times article 22nd March 2009, yesterday reported on interview with Baroness Vadera Business Minister for HMG. She stated that there have been £30m a week of loans granted now under EFG, so thats the scheme working as planned she says, once more.

As to PG's and the banks, she stated that the banks will not be able to take new guarantees secured against matrimonial property. So thats clear then, they can take a PG but they cannot secure this against property?

But, if you already provide a secured personal guarantee (i.e. one secured against your home) that will not stop the bank taking this into consideration in a future default. Clearly a PG can be called in and the guarantor made bankrupt if he or she cannot pay.

This will be very interesting in the fullness of time. Imagine if £1.3bn of loans are given to SME's, then we have two years of recession and slow recovery. Obviously some of these companies will fail in future.

Then the loans will be called in. So we could have the PR nightmare for that next Government of the Government owned banks taking houses from people whose business has collapsed?

What fun and games that may lead to.

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