Small Firms Loan Guarantee Scheme

The Small Firms Loan Guarantee Scheme has been suspended. The type of lending previously provided under SFLG – to businesses that lack collateral and/or track record – will still be available under the new Enterprise Finance Guarantee Scheme.

Terms And Conditions

It is important that borrowers fully understand the terms and conditions of the agreement and their implications.

The Loan Agreement

This is a contract between borrower and lender in which BIS is not involved. The loan is provided entirely by the lender. Many of the detailed financial terms and conditions relating to each loan will vary and are a matter for negotiation between borrower and lender.

In some cases the lender may agree to a capital repayment holiday. This is a period in which the borrower is not required to make repayments of the loan itself but will continue to pay the interest and premium.

For loans under the Small Loans Arrangement, a capital repayment holiday can only be agreed at the outset of the loan and can only be agreed for a period of 6, 12 or 24 months.

For other loans, capital repayment holidays are available in blocks of three months up to a maximum of 24 months, and can be taken at any time during the life of the loan. Interest rates are not fixed by the Government, so the lender will take account of the risks of the proposition as well as the benefit of the guarantee when deciding what rate to apply. The lender may charge an arrangement fee.

Loan Size

Guarantees may cover loans of between £5,000 and £250,000 to any one borrower. Loans can only be made in multiples of £500. Businesses that have been trading for less than two years at the time of application will be restricted to £100,000. A borrower may have more than one loan up to the applicable maximum. Loans guaranteed before June 1984 will not count towards the maximum. Loans to connected borrowers, such as associated companies, companies with common directorships and shareholdings, are counted together for this purpose. Once the maximum has been reached, borrowers will not be entitled to further lending under the Scheme, even if they have repaid their loan, unless their interest in the business which received the loan was less than 20% (10% for loans prior to September 1996).

Loan Length

Guarantees are available for terms between two and ten years, including any capital repayment holiday.

The Guarantee

The Government guarantees 75% of the outstanding amount due to the lender. This will be paid to the lender if the borrower fails to repay. However the borrower remains liable and recovery of the full debt will still be sought – possibly through liquidation.

The Premium

In return for the guarantee, borrowers are required to pay the Government 2.0% a year on the loan’s outstanding balance.

For loans under the Small Loans Arrangement the premiums are paid as a lump sum in advance. This can be added to the loan and be covered by the guarantee. A further premium payment would be required if the loan period is later extended.

For other loans, premiums are paid quarterly in advance, by direct debit, once the borrower has received the loan. In such cases the premium payments will reduce as the loan is repaid.

Loan Payments

Loans under the Scheme must be taken out within six months of the date the loan is guaranteed. Failure to do so will lead to the guarantee being withdrawn. Borrowers can re-apply but consideration will be based on eligibility conditions in force at the time of the new application.

Loans will usually be paid to the borrower in one amount but, for loans not covered by the Small Loans Arrangement, the lender can arrange for the borrower to receive the loan in stages. If this happens, the full loan must be received within two years of the first stage, and there is a maximum of four stages. No stage should be for less than 10% of the total loan. The dates of these payments to the borrower should be specified on the application form.

Monitoring

It is in the interests of BIS and the lender for every business they support to succeed. It is in the borrower’s interest to collect regular financial management information. This information should include a comparison of actual cash flow as well as profit and loss figures against earlier plans. Provision of this information on a quarterly basis is a condition of the loan. On the application form the borrower also agrees, if requested, to provide BIS with a progress report. The point of this is to help BIS assess the value of the Scheme.

If a Business Fails

If the borrower accepts an offer of a guaranteed loan, he or she must agree the terms and conditions governing the loan with the lender. If the borrower then breaks any of these conditions the lender may demand repayment of the loan in full. It is important to remember that, although there is a guarantee, the borrower is still liable to pay the full outstanding loan amount back to the lender, not just the portion the lender has risked.

The lender has the discretion, within the terms of any agreements on security, to apply the proceeds from any business assets to reduce the guaranteed loan. If the proceeds are insufficient to cover both the guaranteed loan and other debts, then any personal assets or guarantees pledged against non-Scheme lending would be used to reduce the other debts. If the borrower has business assets, such as stock or premises, that have been taken as security against the loan, the lender will use these to reduce the debt that has not been settled. This will enable the lender to reduce its claim on BIS’s guarantee or to reimburse BIS if it has already paid a claim.

© The Small Firms Loan Guarantee Scheme guide has been reproduced from information published by the Department of Business, Innovation and Skills (BIS) and in accordance with Crown Copyright.
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