Being turned down for a finance facility can be disheartening, particularly when you feel you have a strong and viable business plan that you can’t realise. If you’re wondering what your next move should be, you may want to consider the Enterprise Finance Guarantee (EFG). This government scheme has helped numerous business owners achieve their goals and has resulted in the financing of many new franchises.
What is the EFG?
The Enterprise Finance Guarantee was established in 2009 as a way of helping those whose previous loan and finance applications had been turned down. Set up with the objective of helping increase small business investments, the scheme offers borrowers an alternative source of finance to get their business off the ground. It is primarily aimed at those who have had issues finding finance due to insufficient security or evidence of previous business success. By the end of 2016, it had guaranteed £2.7 billion worth of finance to over 26,000 small businesses.
Essentially, the EFG offers to guarantee 75 percent of each loan, increasing the possibility that a finance application will be accepted rather than rejected. Outside of this guarantee, the government takes no further part in the decision-making process and is not involved in the lending agreement.
This means that although the offer of a government guarantee may be on the table, the final decision remains with the lender. In some cases, the lender may conclude that the EFG is not advisable or appropriate and will still refuse the loan application. Typically, this is because they do not consider the business to be viable.
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Applicants must meet certain criteria if they are to be eligible for the EFG. The criteria listed below are set out by the British Business Bank plc., but these are supplemented by the lenders’ criteria. Each lender will have their own specific requirements, and these can vary depending on the wider economic situation and their willingness and ability to lend.
The basic requirements dictate that businesses must:
- Operate in the UK
- Not exceed a turnover of £41 million
- Not request finance exceeding £1.2 million
- Need the finance for an eligible purpose and operate in an eligible sector. It’s worth noting that nearly all purposes and sectors are eligible, with a few exceptions.
There are also a couple of caveats:
- If an individual is applying for term lending, they must also have the capacity to repay their debt over a maximum period of 10 years.
- If the finance is required for invoice finance or overdrafts, they must have the capacity to repay their debt over a maximum period of three years.
Types of finance
As you can see above, there are two main types of finance: loans with a maximum repayment period of 10 years and loans with a maximum repayment period of three years. The first type includes new term loans, term loans for debt refinancing or consolidation, revolving facility refinancing and invoice finance refinancing. The latter includes first time revolving facility finance and invoice finance facilities.
However, lenders will only be able to provide finance options that they offer as part of their regular product line. This means that applicants may be limited by the type of products available from their chosen lender, even if the EFG guarantees other types of finance.
In terms of the application process, potential borrowers are advised to communicate directly with their existing lender or a lender that subscribes to the EFG scheme. Once the lender has agreed in principal to offering an EFG backed loan, they’ll begin a two-step application process. At no point in this process does the government have any influence, and all decisions are made exclusively by the lender.
The first step in the application is to assess the borrowing proposal. The borrowing proposal includes all the information usually associated with a finance application. Generally, this means submitting a detailed business plan that includes information as to how the loan will be used, the business’ or individual’s historical financial information and details of other financial support received.
The second step involves assessing the applicant and their proposition to ensure that they meet the eligibility criteria set out above. Once this is complete, the lender will come to a decision regarding the application. It is important to note that even businesses that meet all the criteria involved in steps one and two may be turned down by a lender.
Case study: Domino’s
A fantastic example of the way in which the EFG can operate is a recently opened Domino’s store in Carmarthenshire, Wales. Owned by Jonathan Evans, who has already opened three Domino’s franchises, the new store was financed by HSBC with the help of the EFG. The EFG loan was used to secure a lease on a property at a busy local retail park and to fully outfit the store.
The new store will generate upwards of 40 jobs and provide a much-needed boost to the local economy. With the help of HSBC, the three new stores were launched without any problems and were soon operating successfully. The bank has been quick to praise Evans’ management team and the Domino’s franchise model, and are confident that new stores will go on to perform just as well.
Evans has expressed his desire to open two more stores in the coming year and plans for this are already underway. Given the confidence that HSBC displayed in his team and the expertise it was able to provide, it is likely that Evans will look to their support once again.
Other Types of Finance
Once you’ve got the backing of an EFG, there are plenty of financing opportunities to explore. Let’s take a look at one that’s often taken up by new franchisees: the Start Up Loan.
Start Up Loan Amount & Fees
This is aimed at entrepreneurs who would like to start or grow a business in the UK. It is a relatively small loan of up to £25,000, but if a company has multiple owners or partners with a share in it, there is scope to get more. Each individual can apply for the £25,000 scheme to generate a combined maximum loan of £100,000 for the business.
Specifically, the individual loan must be between £500 and £25,000 and the average amount requested and granted through the scheme is £7,200. The loan is backed by the government and offered unsecured, so applicants do not need to be endorsed by guarantors or put personal assets forward to protect the loan.
Also, unlike other financing options, the Start Up Loan can be obtained without paying application, set-up or early repayment fees, making it a popular choice for savvy entrepreneurs looking to minimise outgoings and maximise their profit potential. The only thing you’ll need to be sure you can finance is the fixed interest rate of six percent per year.
Start Up Loan Repayment Period
You can choose how long you take to pay back your loan depending on your financial capabilities. However, you must have paid back the entire loan amount within five years. Being able to set your own repayment period enables you to tailor your financial obligations to your business and maximise your profits as you start out on the new venture.
Other Perks on Offer with the Start Up Loan
On top of the financial aspect of the scheme, the Start Up Loan also offers business support. It is always in the lender’s interest to ensure that the borrower’s business is as successful as possible. That’s why any individual that secures a Start Up Loan will receive a year of free mentoring after the loan has been granted. This includes help with creating a business plan, and a portfolio of free templates and guides.
It’s not just ongoing support that borrowers benefit from, however. They can also access exclusive business offers through their connection with the lenders, which helps their business perform even better.
Start Up Loan Criteria
As with all loans, you will need to tick a number of metaphorical boxes to be eligible. First of all, you must currently live in the UK and run or plan to run a business that is based in the UK. Also, you must be over 18 years of age.
Also, remember that this is a ‘Start Up’ Loan, so it is important that your business has not been up and running for more than 2 years. If you want to secure this Start Up Loan, you will have to approach the lender as an entrepreneur with plans to launch a business in the near future, or as the owner of a relatively young business that would like to develop the business or expand into new territories.
In short, this funding option is a fantastic choice for entrepreneurs who have big ideas but lack the funding to get them off the ground. To find out more or apply for a Start Up Loan, head to https://www.gov.uk/apply-start-up-loan.
Alice Tuffery, Point Franchise ©