Enterprise Finance Guarantee
The Enterprise Finance Guarantee (EFG) is a targeted measure which supports additional lending, of between £1,000 to £1m, to viable small businesses lacking sufficient collateral or financial track record to access a normal commercial loan. The guarantee can be used to support new loans, refinance existing loans or to convert part or all of an existing overdraft into a loan to release capacity to meet working capital requirements.
EFG was introduced in January 2009 – replacing the Small Firms Loan Guarantee – as a temporary measure in response to the economic downturn which led to the decline of credit to SMEs, and guarantees 75 per cent of the loan. Currently 13 members of CDFA are accredited to lend under the guarantee scheme, making over 200 loans totalling £5.6m since the measure’s inception.
The cdfa has collaborated with BIS to help ensure increased application and suitability for CDFIs.
The Coalition Government increased the facility for 2010/11 by a £200m extension to £700m, and will continue the measure until 2014/15, providing up to £600m of additional lending to around 6,000 SMEs in 2011, and, subject to demand, over £2bn in total over the next four years.
At the CDFA Inside Out 2010 launch event on 13 December, Business and Enterprise Minister Mark Prisk set out reforms to EFG to help support CDFIs and announced guidance to CDFIs to enable greater use of current support.
To help encourage increased use of EFG by accredited CDFIs lenders, the level of payouts that Government will make against defaults will increase from 9.75% to 15% (13% to 20% gross cover provided) for the first £1 million of EFG-backed loans. This should by small and specialist lenders.
Guidance is being provided to enterprise CDFIs to enable them to take advantage of a little-used aspect of the EFG, which enables banks to lend directly to CDFIs, boosting their loan capacity. Under this scheme CDFIs are exempt from the usual two per cent premium on the loans. Each tranche of lending will operate independently at each level (Bank to CDFI and CDFI to SME), providing additional security for banks lending to EFG accredited CDFIs.
Utilising EFG with Community Investment Tax Relief (CITR)
Community Investment Tax Relief (CITR) incentivises private investment into CDFIs. By combining EFG with CITR, CDFIs can attract greater levels of investment. However, there are some restrictions when using the two schemes in tandem.
EFG and CITR can be used in conjunction at the bank-CDFI interface. However if the CDFI is an EFG lender then funds received using CITR cannot be guaranteed through their own EFG scheme. Banks lending to CDFIs using EFG can claim the tax relief, but the money cannot be on-lent to SMEs under the CDFI’s own EFG scheme.