Are banks doing enough to promote funding for SMEs?

Businessman with money under tree
By Ian Harper, CA Magazine

21 March 2016

The Enterprise Finance Guarantee gives SMEs greater access to funding, but are banks doing enough to reach small businesses?

Since its launch in 2009, the Enterprise Finance Guarantee (EFG) scheme has given almost 27,000 SMEs access to lending worth £2.8bn – lending which, the scheme’s administrator, the British Business Bank (BBB), says may never have materialised otherwise.

The EFG facilitates lending to SMEs that are viable but knocked back by lenders because they lack the security to meet a lender’s normal criteria. Under the scheme, the Government offers to bear 75% of the risk, to the lender, of default on each eligible individual loan. This is subject to a cap on the total claims that may be made by each participating bank.

According to the BBB, the EFG is applicable to all businesses, including start-ups: “Across our 40-plus EFG lenders, 18% of EFG programme-related loans offered are to businesses that have an age of zero to three months old.”

Last November, the Government, working with BBB, also introduced a referral scheme that aims to put SMEs knocked back for an EFG loan in touch with alternative sources. 

Three finance platforms will, in turn, contact alternative finance providers and introduce an SME to any expressing an interest. At the moment the platforms are:

  • Funding Xchange
  • Business Finance Compared 
  • Funding Options 

A success story?

EFG had played a valuable and welcome role in making finance available to SMEs – including their own clients – which would have found it difficult, if not impossible, to raise funds elsewhere.

Yet despite its apparent success, there are issues surrounding the funding option, primarily the limited awareness of the scheme. 

Rod Mathers CA, corporate finance partner with Henderson Loggie, said: “There’s a distinct lack of knowledge about the EFG scheme within the adviser and business communities. I know of some experienced advisers who are not clear whether or not the EFG scheme still exists.”

As banks are responsible for that market the scheme, lending money, and benefit from its guarantee, have they done enough to market it to SMEs?

Given the scheme is aimed at smaller businesses, often the business owner/manager is less sophisticated when it comes to finance and could easily be unintentionally misled.

Judith Hartley, managing director, lending solutions with the BBB, says: “Our 40+ accredited lenders typically include information on EFG on their websites and regularly feature EFG case studies in the press. That said, more can always be done. 

She continues: "We are working in partnership with our lenders and stakeholders to make sure awareness of EFG is as high as possible.”

Another issue relates to the information given to SMEs. Rod says there’s confusion about who is covered by the guarantee: “In my experience clients sometimes believe that if there is a default the Government will cover their exposure by 75%," explains Rod.

“However, this is not the case, but rather the bank is covered in the event that the principals default on their personal guarantee. 

"Given the scheme is aimed at smaller businesses, often the business owner/manager is less sophisticated when it comes to finance and could easily be unintentionally misled. More can be done to avoid this situation.”

Criticisms or real problems?

The underlying principle of the EFG is that the Government takes the brunt of the risk of default, which in turn encourages banks to lend to SMEs.

But according to Mike Smith, director and senior consultant, Jameson Smith & Co, a turnaround and company rescue practitioner, while the EFG is “a great idea” it has its problems, including training, incorrectly set up schemes, and misconceptions about personal guarantees.

On training, Mike noted: “The majority of the problems occur with poor training of bank staff at the outset and the lack of awareness within the SME community. 

ICAS, in its response to the BIS Access to Finance Inquiry, notes: “EFG has been less successful, we believe, partly due to the banks’ interpretation of the scheme, which may often require them to take personal guarantees.”

Improving administration

Meanwhile, at the BBB’s instigation, RBS has carried out an in-depth internal investigation of its administration of the EFG.

Judith says: “This flagged up some areas of concern. The BBB insisted that RBS work to understand fully the issues and put them right. As a result, RBS put in place a plan to rectify the issues identified, to ensure that their customers did not suffer detriment and that the taxpayer did not incur any loss." 

Judith continues: "RBS has drawn their remediation work to a conclusion. All affected customers have been kept informed throughout the review and have now received outcome letters."

RBS remains an accredited EFG lender. The bank said: “We have made significant changes to ensure EFG loans will always be dealt with appropriately. This includes improvements to systems and controls and enhanced training for our staff.”

The EFG is a scheme with great potential, that perhaps needs greater awareness among SMEs and the banks to unlock that potential. The scheme could make an even greater difference, supporting SME growth, but to do so it needs to be embraced more wholeheartedly by the banks – and by the accountancy profession.

Read the full version of this article in the March 2017 edition of CA magazine.


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