Loan Guarantee Scheme
Practical Information and
Advice about the Scheme
And How it Works
Contents
General Advice to Potential Borrowers
What is the Small Firms Loan Guarantee Scheme?Who is eligible for the Small Firms Loan Guarantee Scheme?
Eligible BusinessesEligible Activities
Eligible Purposes
Ineligible Purposes
How to Apply
Terms and Conditions
The Loan AgreementLoan Size
Loan Length
The Guarantee
The Premium
Loan Payments
Monitoring
If a Business Fails
The Business Plan
Complaints ProcedureContact Points
APPENDICES:
Activities where Restrictions Apply
Lenders Currently in the Scheme / 2
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The Small Firms Loan Guarantee Scheme is a joint Venture between the Department of Trade and Industry and Lenders.
General Advice to Potential Borrowers
Before applying for any form of finance, potential borrowers should have considered carefully the needs of their business. What is the money needed for? Will it be used for working capital, fixed capital or project development costs? How much money is required? Have all kinds of finance available and the costs been investigated?Loan finance normally requires regular payments and interest payments to the lender. For some purposes fixed term loans are more appropriate than overdrafts and vice versa. Much depends on how quickly a business can generate cash for / Payments. Leasing or hire purchase may be another way of financing some requirements.
There is also equity finance, a risk-bearing investment provided by shareholders or partners in the enterprise. Equity capital normally carries no fixed charges and is particularly valuable in a start-up or expansion phase when cash flow may be tight. Equity finance can also be provided by specialist financial bodies.
The Small Firms Loan Guarantee Scheme can only provide guarantees against loan finance.
What is the Small Firms Loan
Guarantee Scheme?
Small firms with viable business proposals which have tried and failed to obtain a conventional loan, either because of a lack of security or business track record may be able to obtain finance under the Small Firms Loan Guarantee Scheme. By providing a government guarantee against default by borrowers, the Scheme enables high street banks and other financial bodies to lend between £5,000 and £250,000 to new and existing businesses. Between June 1981 and March 1999 over 66,000 loans have been guaranteed.How the Small Firms Loan Guarantee Scheme works:
· it is intended to be in addition to normal commercial finance. It is not available if a conventional loan can be obtained;
· once a lender has decided that an applicant has a viable business proposal and is acceptable for a loan / · under the Scheme, the lender applies to the Department of Trade and Industry (DTI) for a guarantee;
· DTI issues the lender with a guarantee;
· in return for government support, a premium is payable by the borrower to the DTI;
· if the loan is for £30,000 or under, certain banks and other lenders can grant the application themselves without first referring to the DTI’s Small Firms Loan Guarantee Scheme section (the Small Loans Arrangement);
The Scheme is a joint venture between DTI and lenders.
All commercial decisions affecting borrowers are taken by the lenders. The Department cannot intervene.
Who is eligible for the Small Firms Loan
Guarantee Scheme?
Guaranteed loans are available if the borrower runs or is about to run an eligible business, the proposed business activity is eligible and the loan itself is required for eligible purposes. So what is eligible? / ownership or control will be considered as one unit, with the total number of employees and joint turnover considered against the eligibility criteria.If a borrower has previously been involved with a business that has failed under the Scheme, he or she must declare this failure on the application form. This declaration does not mean automatic rejection, but failure to declare this previous loan may result in applications being rejected.
Eligible Businesses
There is an overriding limit of 200 employees. Eligible businesses are sole traders, partnerships, franchises, co-operatives and limited companies, either trading or about to trade in the near future. Turnover in the 12 months leading up to the loan application is also taken into account in establishing eligibility. Current information on turnover limits is available from the DTI’s Small Firms Loan Guarantee Unit (see Contact Points) or any of the Scheme lenders.
Groups of companies or businesses with broadly similar
Eligible Activities
Eligible activities cover many types of businesses involving goods and services. These include all manufacturing, construction firms and many service industries.
Eligible Purposes
/Ineligible Purposes
Eligible purposes are business uses only. Finance may be used for developing a project, starting up trading, expanding an existing business or improving efficiency. The borrower must describe, in detail to the lender, what the money will be used for. / Ineligible purposes are buying a company’s shares, buying out members of a partnership, replacing existing loan and overdraft facilities or financing interest payments.How to Apply
Application forms are available only from lenders involved in the Scheme. In the first instance applicants should contact the lender with a view to obtaining conventional finance. Only if conventional lending is denied through a lack of security or business track record can the Small Firms Loan Guarantee Scheme be considered.Applicants must present the lender with a clear business plan and financial forecasts both to test the business’s viability and to identify finance requirements.
Before offering a borrower a Small Firms Loan Guarantee Scheme loan, lenders have to satisfy themselves that they would have offered conventional finance but for lack of security. / They should establish that all available personal assets have been used for conventional loans. Personal assets or guarantees cannot be taken as security for a Scheme loan. It is the lender’s decision whether or not personal assets are available to be used for conventional lending. However, the borrower may be required to pledge premises, machinery and other possessions used in connection with the business as security for the guaranteed loan. The lender will usually take a fixed or floating charge over such assets. Security taken by the lender in respect of guaranteed lending will always apply to the whole loan, not just the proportion not covered by the guarantee.
Terms and Conditions
It is important that borrowers fully understand the terms and conditions of the agreement and their implications. They are: / 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.The Loan Agreement
This is a contract between borrower and lender in which the DTI 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 Loan 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.
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 then 20% (10% prior to September 1996). / The Premium
In return for the guarantee, borrowers with loans at a variable rate of interest are required to pay the DTI a premium of 1.5% a year on the loan’s outstanding balance. This reduces to 0.5% for borrowers with loans at a fixed rate of interest.
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 Length
Guarantees are available for terms between two and ten years, including any capital repayment holiday.
The Guarantee
The DTI guarantees 70% of the outstanding amount due to the lender. This rises to 85% for businesses that have been trading for two years or more at the time of application. 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.
Loan Repayments
Loans under the Scheme must be taken out within six months of the date the loan is guaranteed. Failure to do so will lead in 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. / provide the DTI with a progress report. The point of this is to help the DTI 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
Monitoring
It is in the interests of the DTI 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
lending would be used to reduce the other debts. If the borrower has business assets, such as stock or premises, that has 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 the DTI’s guarantee or to reimburse the DTI if it has already paid a claim.
The Business Plan
The importance of a carefully prepared business plan is often under-estimated. The borrower must convince the potential lender that he or she has a viable business proposal. This cannot be done without a business plan. A local Business Link (Business Connect in Wales, or Small Business Gateway in Scotland), Training and Enterprise Council, Local Enterprise Company, Enterprise Agency or qualified accountant may be able to help draw one up. Many lenders also have their own publications containing advice on how to plan and monitor a business, as well as specialised small firms advisory offices.In addition to having a business plan, the borrower must also convince the lender of a personal commitment to the business. Personal Commitment (or lack of it) plays a crucial role in influencing the lender, and it is not always measured in terms of finance. Each case is judged on individual merit. / A potential lender would expect to see information on:
· management: key personnel, their experience, knowledge of industry, age, education and training;
· product or service: details of product or service on offer, state of product development, any follow-up products or services;
· markets: description of the market size, customers, competitors, sales estimates and expected market penetration. Sales forecasts should be supported by hard evidence and research wherever possible. Also an explanation of how the business will succeed in the market against competition;
· the business: when started, results to date, borrowing history, existing commitments, current bankers;