“What exactly is an EFG’ and how could it affect me? Can you provide free advice?”
The Enterprise Financial Guarantee, or ‘EFG’ was first introduced into the UK in 2008 to replace the Small Firms Loan Guarantee Scheme. The scheme started with the best intentions and still provides valuable funding for smaller companies who would not otherwise have access to it.
How does the EFG scheme work?
The scheme works by providing security for the lender allowing the business borrower access to funding on the basis they have insufficient security to do so otherwise. This principle is often misunderstood and or misinterpreted leading directors to believe it is their risk that is being covered not the banks. Over the last 3-4 years there has been increasing criticism of the banks selling practices involving a range of products and I’m afraid the Enterprise Financial Guarantee is no different. Poor training within the banks does not help and when combined with the pressure to alleviate the banks risk then there is a perfect environment for things to go wrong at the worst possible time for directors.
There is a clear trend when speaking to directors that indicates there is a lot of confusion around whose risk is protected and a significant portion of directors do feel they have been clearly misled. The banks will argue it is the directors’ responsibility to understand agreements they enter-into and to an extent I do agree with this line of thought. The counter argument is that banks have huge resources and make massive profits, so should have the ability to improve the training and or understanding to the borrower.
Whether or not there is anything suspicious about the bank’s activities clearly there is a communication problem at least and more effort needs to go into the area of understanding. On the more negative side I have also seen clear evidence of very suspicious actions by senior banking staff which lessens the bank’s exposure and increases the directors. This was clearly not the government’s aim.
Enterprise Financial Guarantee key points
- The EFG is not an insurance that will pay out if the company is liquidated.
- Director/s will be liable for 100% of the loan and not just the 25% as is often thought.
- Overdrafts should not be removed and replaced with an EFG loan without leaving adequate funding in place.
- The 2% premium goes to the BIS ultimately to cover the costs of all EFGs it is not an insurance premium.
- Your assets are at risk outside of the family home.
- You should not be asked to remove assets from any EFG application.
- As a director you should ensure you understand what you are signing and thereby agreeing to on behalf of your company, indeed you have a legal obligation to do so.
Be cautious, as director, if you have a significant overdraft with a personal guarantee and you are offered another loan with an Enterprise Financial Guarantee by the bank’s regional manager which will take away 75% of ‘your liability’. Quite simply, this is untrue and you as a director will be held liable for 100% of the personal guarantee. It is only when the lending bank has pursued the director/s through the normal channels that they can eventually make a claim from the government for any remaining balance.
If it sounds too good to be true then it probably is, but you can read more here on the government’s website: https://www.gov.uk/understanding-the-enterprise-finance-guarantee.
Prefer to talk? Find out more information on Enterprise Financial Guarantees, or EFG and how they can affect you by calling us on 08000 746 757 or use the live chat facility at the top of the page.