THE SFLG SCHEME IS TEMPORARILY SUSPENDED HAVING BEEN REPLACED BY THE ENTERPRISE FINANCE GUARANTEE SCHEME.
NEW SFLG RULES ARE EXPECTED LATER IN 2009.

THIS ARTICLE WILL REMAIN IN PLACE FOR INFORMATIONAL PURPOSES ONLY.

Small Firms Loan Guarantee Scheme – Rules and Eligibility

This article covers the background to the Scheme, the implications of any rule changes, and a summary of Scheme eligibility and lending terms in an easy to read table format.

Background

The current Scheme rules date back to 2005, when they were updated as part of a review conducted by Teresa Graham OBE but with one major change introduced in the March 2008 Budget which removed the restriction regarding the age of a business who would qualify for support (see below)

Under the Scheme, the Department for Business, Enterprise and Regulatory Reform (previously the Department for Trade and Industry) guarantees loans made by banks and other financial institutions to small firms with viable business proposals that have tried and failed to get a conventional loan because of a lack of security.

All aspects of the Scheme are administered by those lenders who are authorised to offer SFLG facilities. Borrowers apply for finance in the normal way and the lenders decide whether the Scheme should be brought in to play, and if so whether any loan complies with the rules.

Furthermore, if they do approve a loan under the Scheme, they are also nowadays responsible for issuing the guarantees in favour of themselves, on behalf of the Government!

The anomaly of this approach often leads to difficulties, since lenders frequently interpret some of the more subjective Scheme rules differently and we have already seen cases where lenders have responded very differently to the same loan application. The two most common areas have been in the purchase of business assets (where restrictions exist) and in the eligibility of an individual due to the availability of personal assets that could otherwise be taken as security for conventional funding, such as standard bank loans and overdrafts.

The change announced in the March 2008 budget concerning the age of businesses that qualify for the Scheme is likely to cause further confusion. Businesses over 5 years old will now qualify if they have “growth aspirations”. Quite what this means is not yet clear as unfortunately, no detail seems to have been published about this change.

As such, it is now very difficult except in the most clear-cut cases to be sure whether an SFLG application will be accepted or rejected.

In these circumstances, best advice for borrowers is therefore to take advice at an early stage. We have experience in applying the Scheme rules and will be happy to help if needed. If necessary, we can make discreet enquiries before submitting an application for finance that we anticipate will need the support of the SFLG Scheme.

Summary of Scheme eligibility and lending terms

Restricted trading activities	Not all types of business or industries are eligible. Activities where there are exclusions and restrictions are: Agriculture & horticulture Authors, music composers & certain other own-account artists Banking, finance & other associated services Betting & gambling Commission agents Education Fisheries Forestry Insurance & associated services Medical, health & veterinary services Owning & dealing in real estate Postal services Professional sports players & sporting organisations Public administration, national defence & compulsory social security Ticket agents Tied public houses Transport
Restricted loan purposes	Buying shares in a company; buying out members of a partnership; replacing existing borrowing; and finance solely for export purposes. Funding is available to enable one business to buy another, but only for purchasing assets, not shares.
Other qualifying criteria	All available business and personal assets of the owners must be fully pledged in support of conventional borrowings before a borrower becomes eligible for SFLG support. In order to limit the Scheme to start ups and early stage businesses, eligibility is normally restricted to those trading for a maximum of 4 years (depending on when the accounting year end falls). However, the March 2008 budget announced that eligibility would now be extended to businesses over 5 years old who have “growth aspirations”. Maximum sales £5.6 million for all business types. No maximum number of employees (previously, maximum 200 employees but this was removed as part of the 2005 review). The “connected person” restriction was also removed in 2005. Previously, a “connected person” was someone who owned 20% or more of a business that was applying for SFLG funding. If that person also held a stake of 20% or more in another business that either currently or previously borrowed under the Scheme, then the total borrowings of all that connected person’s businesses would be taken into account when calculating the maximum amount already borrowed under the Scheme.
Amount	Maximum and minimum amounts - from £5,000 to £250,000 Previous loans taken under the Scheme are taken into account when calculating the amount available to borrowers (unless the previous loans were repaid more than 10 years ago, in which case they no longer count towards the scheme maximum of £250,000).
Term	Repayment term from 2 – 10 years
Interest rate	Negotiable with the lender
Fees	Lending fee by negotiation. Annual premium of 2% of the outstanding loan balance payable to DTI.
Drawdown	Staged drawdown available (maximum of 4 months and entire loan must be drawn in the first 12 months).
Capital repayment holiday	No limit on length of capital repayment holiday (previously up to 2 years maximum).
Guarantee amount	Guarantee value 75% of outstanding loan balance.