Judith Hartley, MD, Lending Solutions at the British Business Bank, explains how the Enterprise Finance Guarantee, a government-backed lending scheme designed to help smaller viable businesses who may be struggling to secure finance, widens the pool of lending for UK businesses
When a small business is turned down for a loan by a lender, it may well be tempted to abandon its plans for growth. In fact, according to research from the British Business Bank, a third of SMEs who are rejected for finance by their lender, tend to give up looking altogether. This of course means the small business might miss out on potential opportunities to expand and create new jobs, with an adverse knockon effect for UK economic growth.
What many small businesses do not know is that, where the reason for the credit decline is “lack of security”, the Enterprise Finance Guarantee (“EFG”) may be able to help.
EFG was launched by the government in 2009 to encourage lending to UK small businesses which are viable but have inadequate security to meet their lenders’ normal security requirements. EFG helps turn a “no” credit decision in to a “yes”, by providing accredited lenders with a government-backed guarantee for 75% of the loan value.
There are currently more than 40 lenders who are accredited to partner with the British Business Bank to deliver EFG to the market. These include all the main clearing banks such as Barclays, HSBC, Lloyds and RBS, together with challenger banks, responsible finance providers, small local lenders and some invoice finance lenders.
Financing Growth spoke to Judith Hartley, MD, Lending Solutions at the British Business Bank, about how EFG increases the supply of lending to UK small businesses and also about recent enhancements to the scope and reach of EFG.
What problems are SMEs facing right now in terms of lending?
The British Business Bank continually scans the SME finance market to monitor what is happening in terms of the supply of finance to small businesses and also to identify any emerging trends or issues. There are definitely a number of encouraging points to note right now, for example, net bank lending to businesses has been positive for the last two years – in other words, from the beginning of Q4 2014 to the end of Q3 2016, new lending has exceeded repayments by £5.3 billion, according to the Bank of England. That said, gross new lending to SMEs has fallen over the last two quarters (Q2 and Q3 2016), so we do need to keep an eye on this to monitor whether this is a temporary feature or the start of a more enduring trend.
In terms of other “positives” in the market right now, there are an increasing number of alternative finance options which are becoming more established, mainstream and accessible to smaller businesses. These include options for different forms of finance (for example, asset or invoice finance) as well as different types of finance provider, for example, challenger banks, peer-topeer lenders and also equity providers. For example, in 2015, there was an 85% increase in lending to small businesses via the peer-to-peer sector as well as £3.5 billion invested into small businesses by equity providers. This data, from Beauhurst, is included in the British Business Bank’s 2016 Equity Tracker report, which tracks a range of sources of equity funding, including venture capital funds, business angels and equity crowdfunding.
Finally, we also have a record number of small businesses within the UK at the moment – approximately 5.5 million of them (BEIS Business Population Estimates, October 2016), including a record number of new start-ups – 383,000 new registrations in 2015, the highest recorded since comparable records began in 2000 (ONS Business Demography 2016).
This ‘high birth rate’ for start-ups is great news for the national economy – over the five years to 2013, 85% of all new jobs in the UK were created by small businesses with less than 50 employees (Enterprise Research Centre, Goldman Sachs and British Business Bank, 2015), so the more small businesses we have out there, the better it is for the UK economy.
All of these “positives” are very encouraging. However, there are still some challenges. One of the biggest is making sure that small businesses know what their options are, if they are looking for finance. We know that most small businesses tend to give up on their growth plans, if they are not successful on their first attempt at seeking finance. We therefore need to make sure these small businesses know that there are alternatives. The better informed small businesses are about their finance options, the more likely it is that they will pursue their investment and growth ambitions and the better this is for job creation and the UK economy.
It is part of the British Business Bank’s remit to raise awareness of the full range of finance options available to smaller businesses. To help achieve this, we publish the Business Finance Guide, in partnership with ICAEW and 21 other finance and business representative organisations (including the FSB). It’s also available as an online, interactive, guide, providing information on different sources of finance available to businesses – from start-ups to SMEs and growing mid-sized companies.
You can find it at www.thebusinessfinanceguide.co.uk/bbb. It is very important that we, and our partners, continue to build awareness and understanding of these options.
In addition to informing small businesses about their finance options, the British Business Bank is aware that there will always be a number of small businesses that are viable, but unable to provide the security that lenders would need in order to lend to them – and this is where the Enterprise Finance Guarantee comes in.
So what does the Enterprise Finance Guarantee do? EFG is aimed at helping UK small businesses – whether they are sole traders, partnerships or limited companies – with turnover of up to £41 million, from across a wide spectrum of sectors. As mentioned already, it’s there for when a viable small business wants to borrow but doesn’t have the security that a lender would normally require. EFG steps in and provides the lender with the security it needs so that the credit decision can potentially go from a “No” to a “Yes”. EFG provides the lender with a 75% guarantee against the value of the loan. Decision making on individual SME eligibility is fully delegated to the 40+ accredited EFG lenders who partner with the British Business Bank to deliver EFG.
When are those guarantees called upon?
Guarantees are called upon by the lender if the borrower defaults. When this happens, the lender would undertake its normal default and recoveries activity with the borrower, just as it would with any commercial transaction. This includes realising security, if the small business has provided any security to the lender to support the loan. If, after completing recoveries activity, the lender still has outstanding exposure with the borrower, then the lender can claim 75% of that outstanding balance from the government.
Is EFG working?
Since its introduction in 2009, EFG has helped support £2.7 billion of lending to more than 26,000 small businesses. Just to be clear, that’s 26,000 small businesses which wouldn’t otherwise have been able to obtain finance from their lender. We are very proud of the impact EFG has had so far. As the economy goes through different points in its cycle, the extent to which lenders will look to use EFG to support lending will vary. This is part and parcel of EFG’s design and we expect this.
Without EFG, what would the alternative lending options for SMEs be?
Where banks are unable to provide finance to small businesses via either a standard commercial product or via EFG, the recently launched bank referrals platforms programme would come in to play. More detail on this new initiative can be found at www.british-business-bank.co.uk/bank-referrals.
What about the planned expansion of the programme?
The BBB recently undertook a strategic and operational review of EFG and published the results in April 2016. One of the recommendations from this review was that we should explore expanding the scope of the scheme to include asset finance lending, and that we should widen the pool of lenders participating in the scheme.
The British Business Bank had received a number of requests from the asset finance sector to consider designing an option within EFG so that the asset finance sector could be supported. We have therefore worked with the FLA (the trade association for the asset finance sector) to establish an appropriate design and formally opened up EFG to the asset finance sector over the summer.
What is the potential impact of Brexit for the SMEs you support?
The British Business Bank works with more than 90 finance partners who are active in the small business finance market. From our interactions with our partners, as well as business bodies and small businesses themselves, we are aware that the Referendum has introduced greater uncertainty to the outlook. This uncertainty may be leading small businesses to put investment decisions on hold. But that should be put in the context of a decline in small business confidence first picked up in the FSB’s surveys at the end of 2015, sometime before the Referendum, suggesting that other factors have been weighing on small business sentiment over the year. Further context is provided by the FSB’s latest Q3 survey, the first gathered since the result of the EU referendum. It shows investment decisions remain subdued, with only 11.4% of small businesses reporting that they intend to increase capital investment over the next quarter. Importantly, however, that is broadly unchanged from Q2 2016 when the Referendum was held.
What’s your message for SMEs?
Check out the British Business Bank website for the list of accredited EFG lenders. If you are looking to grow your small business and you believe you have a viable business plan, but you are concerned that you may have insufficient security to meet your lender’s requirements, then ask your lender about the EFG scheme!
CASE STUDY: Mango Bikes
PARTNER: Lloyds Bank
Mango Bikes is one of the UK’s fastest growing direct-to-customer bike firms. Based in Cirencester, the firm has secured a £150k funding package with Lloyd’s Bank through the Enterprise Finance Guarantee.
The finance is enabling them to launch an innovative new range of road bikes, and Mango Bikes now expects its product range to quadruple within the next four years. To help deal with the expected increase in customer demand, both at home and overseas, the company has created six new jobs – and plans to add four more within the next 12 months.
CASE STUDY: Biowise (trading as Wastewise)
PARTNER: Clydesdale and Yorkshire Banks
Biowise (t/a Wastewise) is a leading provider of total waste management solutions across Hull and East Yorkshire. The company specialises in the collection, recycling and composting of household and commercial and industrial waste to help reduce greenhouse gas emissions and recover valuable raw materials.
Based in East Yorkshire, Wastewise is committed to helping its public and private customers improve their environmental performance – while lowering costs. Each year, it handles more than 100,000 tonnes of waste across their various operations with an overall recycling and recovery rate of more than 90%.
To grow the business, Wastewise needed finance to support the development of a new state of the art In-Vessel-Compositing facility. This was needed to fulfil a £25m contract to handle more than 60,000 tonnes per annum of kitchen and garden waste from households in Hull and East Riding over the next ten years.
It applied for a 5-year term loan of £1.2m via the Enterprise Finance Guarantee, and succeeded in raising more than £4m of funds, including £2.1m from Yorkshire Bank. As a result, the company was able to fully fund the development of the new plant, meaning it was in a position to fulfil its new contract with Hull and East Riding Councils.
James Landau, Wastewise’s managing director, says: “Securing the funding […] has given our business the boost it needed to take us to the next level. As a result, we have opened our new plant which will help reduce the impact everyday waste has on the environment by providing a sustainable alternative to traditional landfill sites.”
He said the whole process was simple, from applying right through to receiving and allocating the funding. He adds: “Our customers are thrilled with the new plant which will have a real impact on the way Hull and East Riding manages its organic waste.”
CASE STUDY: Bill Dyson Skip Hire
PARTNER: The Business Enterprise Fund
Bill Dyson Skip Hire is a waste management service based in Pudsey which serves clients from domestic to industrial proportions. As an expanding business, it was looking to purchase three new vehicles to open further business opportunities.
Lisa Dyson, a director at the company, approached Mark Tudor of Tudor Financial Consultants Ltd with a temporary cash flow issue. He referred Lisa to The Business Enterprise Fund (which has offices throughout the region). Her loan application was swiftly turned around, and the three new vehicles were purchased, increasing the company’s fleet to a total of nine.
The new vehicles also sport a new livery, ensuring the business looks refreshed, professional and more competitive than ever.