One in five Enterprise Finance Guarantee loans ends in default

Figures from Bridging Finance have found that the government lending facility, aimed at those which have previously been rejected by providers of traditional commercial loans because of a lack of security or “proven” track record, is financing firms that go into default 15 per cent more than normal.

EFG is managed by British Business Financial Services, a wholly-owned subsidiary of British Business Bank, but is “on the balance sheet of the Department for Business, Innovation & Skills”, according to a statement. It provides 75 per cent guarantee to lenders.

What you need to know about the Enterprise Finance Guarantee

Bridging Finance is now calling on businesses to review lending exit strategies before securing finance facilities. Going into more detail, Bridging Finance managing director Chris Baguley said: “It seems clear that the EFG model is open to default rates which are approximately 15 per cent higher than expected under commercial lending.

“There is no denying that reduced lending from banks has meant many businesses are turning to alternative forms of finance.”

Baguley cited an ASTL report that concluded the value of loans written in 2014 grew by 62.5 per cent over 2013, and stressed that flexible finance need not end “sourly” as long as an exit strategy is planned form the start.

This would include setting up a repayment strategy from the very start to protect businesses and lenders from defaults and missed payments.

Read more about EFG:

• Enterprise Finance Guarantee scheme hits three-year high
• New lenders join Enterprise Finance Guarantee scheme
• Enterprise Finance Guarantee scheme numbers released

“It’s crucial you are sure of your exit strategy, in other words how you will repay the finance facility once its term comes to an end. As a lender, we won’t provide finance unless a viable exit plan is in place. This gives your business focus,” he added.

“The majority of exit strategies involve either refinance or sale. Short-term funding fills the gap whilst companies secure long term finance from the sale of a property or other business assets. Other typical exit strategies can include the sale of a business or shares, cashing in investments or repayment of invoices due.”

In January it was revealed that RBS had mis-sold EFG business loans by not suitably explaining the structure of the scheme. Having lent out in excess of £900m through EFG, the bank was forced to open a “thorough and proactive review” .

Customers of RBS voiced complaints that each were led to believe the scheme’s benefits were for them, when instead it was for the bank.

Image: Shutterstock

By Hunter Ruthven

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