One thing that cannot be disputed is that businesses require capital or rather funding for them to continue their operations and benefit the community. On the subject of funding, securing funding might be a daunting obstacle for most small and medium-sized enterprises (SMEs). The primary reason behind this is the perception that banks have. They are often viewed as higher risk, demanding significant collateral or extensive track records prior to opening their vaults. Now, this is where the Enterprise Finance Guarantee (EFG) steps in. It comes to act as a bridge between ambitious enterprises and the crucial funding they need to thrive. Let’s still deep in deeper into what is enterprise finance guarantee.
What is Enterprise Finance Guarantee (EFG)
According to the United Kingdom Government, EFG is a loan guarantee scheme to encourage additional lending to viable small and medium-sized enterprises. Therefore, EFG is basically a financial support scheme that has been designed to facilitate lending to SMEs that lack the requisite collateral or credit history to secure loans.
This scheme was launched in the year 2009 by governments in collaboration with financial institutions. Due to it being government-backed, many challenges faced by viable SMEs are addressed. This scheme operates by providing lenders with a guarantee of up to 75% on the standing balance of a loan extended to an eligible business. Essentially, this mitigates the risk of lenders, making them more likely to approve loans to promising enterprises that might otherwise be overlooked. This implies that EFG focuses on encouraging banks and other lenders to extend credit to viable businesses that, under normal circumstances, might be deemed too risky.
Key Objectives of EFG
Based on the reason behind its establishment, the key objectives are twofold.
First, it seeks to provide SMEs with access to the funding they need to thrive and expand their operations. This is funding that such businesses would not be able to get under normal circumstances.
Secondly, it aims at stimulating the growth of the economy by fostering entrepreneurship and job creation. This is because as the number of eligible business increase, more SMEs are encouraged to increase their workforce and diversify their operations.
These two stand as a testament to how EFG’s ability to assist in the mitigation of financial risks connected with lending to SMEs plays a major role in bolstering the backbone of many economies. According to Joseph & Dhanabhakyam (2022), the World Bank holds that SMEs account for 90% of business and more than 50% of jobs. With the scheme focusing on SMEs, a lot of boost is impacted on the economy.
Mechanics of EFG
The core mechanism of EFG entails the provision of government-backed guarantees to lenders. Upon applying for a loan under the EFG scheme, the government steps in to guarantee a significant portion of the loan amount for an SME. It is this guarantee that serves as a safety net for lenders, as it reduces their exposure to risk and makes it more attractive for them to lend to businesses that may otherwise be considered too risky.
Despite being a valuable tool for many SMEs, not all SMEs are eligible for the scheme. The eligibility criteria, typically include factors like the size of an enterprise, its financial health as well as the purpose of the loan.
It is also important to note that loans under this scheme come with specific terms and conditions that both lenders and borrowers must adhere to. This is the same for all aspects that require agreements or taking a loan from a bank without being backed up by a government.
Just like in taking a loan in normal circumstances, the interest rates, repayment periods, and other terms are determined by the lender. The government’s guarantee often allows for more favorable terms than businesses might obtain through traditional lending channels.
How EFG Plays Its Part
The eligibility for EFG is mainly determined by the lender. In most cases, the following is put into consideration.
- Eligibility: Businesses with an annual turnover of up to £41 million and operating within eligible sectors can apply for EFG-supported loans. The scheme prioritizes businesses exhibiting strong growth potential and a robust business plan.
- Loan Size and Scope: EFG guarantees cover loans ranging from £1,000 to £1 million. The funds can be used for various purposes, including purchasing equipment, investing in infrastructure, or financing working capital needs.
- Reduced Collateral Requirements: Traditionally, banks require substantial collateral to mitigate risk. However, the EFG guarantee significantly reduces this burden, allowing viable businesses to secure funding even with limited assets.
- Shared Risk and Responsibility: While the government provides the guarantee, the lending decision and loan servicing remain the responsibility of the chosen financial institution. This ensures responsible lending practices and fosters a collaborative approach to supporting SMEs.
- Geographical Location: Business ought to be operating in the United Kingdom.
Advantages of EFG
Among the major advantages of EFG is that it opens up avenues of finance for SMEs. These are avenues that these enterprises might otherwise have struggled to secure funding. This is backed up by the government-backed guarantee which provides lenders with the confidence to support businesses that exhibit growth potential but lack the collateral that is typically required to access traditional loans. Also, access to guaranteed financing empowers enterprises to pursue growth opportunities with greater confidence, knowing they have access to vital resources.
Beyond benefiting individual businesses, EFG contributes to the overall economic stimulation. This is through the support it provides towards the growth of SMEs as it leads to job creation, increased productivity, and a more robust business ecosystem.
It is also noteworthy to identify the role that the scheme plays in leveling the playing field. This is because it helps to bridge the funding gap between established businesses and promising startups, promoting a more balanced and competitive market environment.
Challenges and Considerations
While it might sound like a well-known scheme, it is actually not that famous. The common challenge that is associated with it, is a lack of awareness among SMEs regarding the existence and benefits of EFG. Although both governments and financial institutions work to bridge this information gap, more effort needs to be put in order to ensure businesses are informed about how EFG can be a viable option for their financial needs.
While the scheme focuses on mitigating risk for lenders, striking the right balance between risk and reward remains a critical consideration. Lenders have a role to fulfill in carefully assessing the viability of businesses applying for EFG-supported loans. This is in an attempt to make sure that the scheme attains its goals without exposing financial institutions to undue risk.
Final Remarks
The EFG stands as a testament to the government’s commitment to fostering a thriving SME ecosystem. This is a scheme that empowers ambitious businesses to overcome the initial funding hurdle, pursue their dreams, and contribute to the nation’s economic prosperity. Keep in mind that whether you are a budding entrepreneur with a revolutionary idea or even an established business seeking to scale up, understanding the EFG scheme and its potential can unlock a world of possibilities. This is a scheme that can turn aspirations into tangible realities.
Reference
Joseph, E., & Dhanabhakyam, M. M. (2022). Role of Digitalization Post-Pandemic for Development of SMEs. In Research anthology on business continuity and navigating times of crisis (pp. 727-747). IGI Global.
