Understanding the Enterprise Finance Guarantee Scheme

In welcoming Wednesday’s announcement from the Government of financial support for small and medium sized businesses, the Institute of Chartered Accountants in England and Wales (ICAEW) is urging businesses to ensure they fully understand the differences between a guaranteed loan and an overdraft, which is a more common means of managing cashflow.

New research conducted among ICAEW members shows that overdrafts are the most important form of finance for SMEs, with 54% of SMEs surveyed having an overdraft facility compared to 37% having a term loan. Overdrafts are critical for many SMEs to manage cashflow.

Around a quarter of SMEs have been contacted by their overdraft provider in the last six months to have the facility renegotiated or cancelled. This compares to only 12% of large businesses and 9% of very large firms.

The Enterprise Finance Guarantee is a huge expansion of the Small Firms Loan Guarantee scheme, which only covered about 3,000 firms and was only about loans. While the new guarantee will also cover overdrafts, it is yet to be made clear how this will work.

Clive Lewis, ICAEW Head of SME issues, said:

“Wednesday’s announcement is a welcome expansion but more details on how it will work in practice are still required. Loans are less flexible than overdrafts, lock businesses into a repayment schedule and require more planning and forecasting. We know this is a real challenge for firms in the current climate. Our latest Enterprise survey established that 58% of members felt planning ahead has become more difficult since the onset of the credit crunch.

“We welcome the announcement of the Enterprise Finance Guarantee (EFG) but in practical terms it represents some challenges.

“The Small Firms Loan Guarantee it replaces was much more limited in scope and the banks were criticized because it was not widely offered. They will have to move up several gears for EFG to have the intended effect.”

Over 9 out of 10 SMEs with overdrafts are expecting to discuss terms of their facility by the end of 2009 while less than 20% of SMEs’ term loans are up for renewal in 2009.

“A focus on support for firms reliant on loans is still important, however, as they typically have covenants, and these are getting stricter and hence harder to comply with. If breached, the loan will have to be renegotiated so the Government package announcement on Wednesday is important in providing a back-up”, Clive suggested.

26% of SMEs and 35% of large firms have renegotiated their largest term loan in the last year, with about half resulting in stricter terms. 18% of SMEs and 11% of large businesses report their largest term loans are up for renewal in 2009. Securing all these loans on acceptable terms will be critical to the economy as a whole given the supply chain relationship between larger and smaller firms.

Further business advice on the sibject can be found in our article Overdrafts & Bank Loans.

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