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SMES MUST BEWARE ENTERPRISE FINANCE GUARANTEE SCHEME PROMISES AND CHECK THE SMALL PRINT CAREFULLY WARNS BUSINESS DEBT EXPERT

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Mike Smith

Business debt advisors Jameson Smith& Co (www.companydebt.com) is warning UK SMEs that are considering the Enterprise Finance Guarantee Scheme (or are already in it) to check the small print carefully after it has encountered entrepreneurs who have suddenly found themselves in severe problems.

Over the past four years the EFG has resulted in over £2billion in loans to UK SMEs (about 20,000 loans with an average value of around £100,000)[i].  The EFGS aims to help entrepreneurs and ambitious SME businesses secure lending from banks and other institutions (that they would otherwise decline for lacking adequate security)[ii].

Mike Smith

Mike Smith

Business debt specialist Mike Smith of Jameson Smith& Co said: “In principle the EFG is a good initiative to encourage lending to SMEs, and around 20,000 have gained loans in recent years through it.

“However, many of the schemes marketed by banks have been over-sold because of its complexities:  the upshot is a lot of entrepreneurs will mistakenly believe the EIS protects their personal assets in the event of the business becoming insolvent.

“Sadly, this is not the case and we get 2-3 calls each week from entrepreneurs who had been led to believe by the bank sales teams they were protected …but have now found that the bank is using the small print to back out or the information provided is just wrong.

“The misunderstanding comes because, with the EFG, the government provides 75% of the security and the borrower believes they are only liable for 25%.  However, many do not realise that if the business fails the borrower is liable for the full 100% of borrowings, not just the 25%.

“On top of this, if the borrower defaults the government expects the bank to pursue them vigorously for the full 100%.  The government only steps in afterwards to help the bank once they demonstrate they cannot recover anything else from the borrower. This process can be very stressful and confusing for borrowers.

“One of the good things the EFG scheme does is exclude the family home from being used as collateral, but the borrower’s other assets are vulnerable.  Some SME owners have been led to believe that these other assets are protected, when this is certainly not the case.”

Jameson Smith& Co advises that SME owners with loans through the EFG schemes should do the following to make sure that their home and other family assets are not at risk:

  1. If there is an EFG involved then be assured you should not lose your house through the direct action of the bank, but as you can see indirectly this may not always be the case. Do not be misled over statements that the EFG is an insurance in case you go into liquidation, or the EFG will pay out if your company goes into liquidation – this is simply not accurate.
  2. A key point of the EFG is that it enables a director to borrow where in normal circumstances they would be granted the loan by the bank but there are simply insufficient assets. The EFG in itself is a good thing but do not be misled into thinking that 75% of the debt will be automatically paid if the company is liquidated – it won’t. With any EFG there will almost certainly be a personal guarantee in place and the only asset that cannot be touched is the family home – if you have other assets they are at risk.
  3. Read the small print of what you have signed.  If entrepreneurs find that the EFG scheme does not cover what they were led to believe, or that the wording is ambiguous, they should seek specialist help (as with any personal guarantee). It is unlikely that your average lawyer or accountant will know what to do, but if in doubt ask if they managed these cases before. We do provide lawyers and accountants with help in these matters as the problem has little to do with the law – it is more to do with experience of the subject matter and negotiations.
  4. As businesses grow, the EFG loans are usually forgotten – diarise to review it every six months. The most practical thing to do is over time to replace the personal guarantee as soon as you can and replace this ideally with a debenture (Charge) on the company assets.

For instance… example EFG case:

One example is a case where we advised involved the directors of a local removal and storage company, a hard working husband and wife, whose business had been liquidated due to the recession hitting the housing market in 2011.  Action under the EFG has not only caused a needlessly traumatic period and put their home at risk of repossession.

The background is that the company had a £40,000 EFG loan and, in addition, the owners had subsequently borrowed personally to keep the company afloat when it got into difficulty – which is not unusual.

When originally signing up for the EFG loan, the directors had been told by the bank to make sure they maintained the 2% premium to the government so ‘they were covered’ and ‘could claim the 75%’ if the company was liquidated.  Again, this is not unusual.

Despite having maintained the payments, when the company had to be liquidated the directors were nonetheless pursued aggressively by the bank until we challenged the situation, resulting in Lloyds agreeing to desist and apologising.

Six months later, the bank changed its mind and went back on the decision, and forced the directors into an Individual Voluntary Arrangement (IVA – a personal voluntary insolvency arrangement with creditors). The directors had been managing these creditors fine, nonetheless the bank forced the IVA.

Nonsensically, once the IVA was in place, the bank then ceased to pursue the directors – having now proven to the government it could go no further, they presumably made their claim.

The upshot is that the bank has not taken one penny from the IVA, but having forced the husband and wife into an IVA they have ruined their credit rating for six years and put their house at risk if the IVA fails.  It has also turned a very difficult but manageable problem into something needlessly traumatic.

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Oil prices steady as lockdowns curb U.S. stimulus optimism

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Oil prices steady as lockdowns curb U.S. stimulus optimism 1

By Noah Browning

LONDON (Reuters) – Oil prices were steady on Monday as support from U.S. stimulus plans and jitters about supplies competed with worries about demand due to renewed lockdowns to prevent the coronavirus from spreading.

Brent crude futures for March rose 7 cents, or 0.1%, to $55.48 a barrel by 1210 GMT. U.S. West Texas Intermediate crude for March was up 5 cents, or 0.1%, at $52.32.

“Sentiment was buoyed by expectations for a blockbuster coronavirus relief package … (but) the tug of war between stimulus optimism and virus woes is set to continue,” said Stephen Brennock of broker PVM.

U.S. lawmakers are set to lock horns over the size of a $1.9 trillion pandemic relief package proposed by new President Joe Biden, financial stimulus that would support the economy and fuel demand.

European nations, major consumers, have imposed tough restrictions to halt the spread of the virus, while China reported a rise in new COVID-19 cases, casting a pall over demand prospects in the world’s largest energy consumer.

Barclays raised its 2021 oil price forecasts, but said rising cases in China could contribute to near-term pullbacks.

“Even though the pandemic is not yet slowing down, oil prices have good reasons to start the week with gains,” said Bjornar Tonhaugen from Rystad Energy.

Supply concerns have offered some support. Indonesia said its coast guard seized an Iranian-flagged tanker over suspected illegal fuel transfers, raising the prospect of more tensions in the oil-exporting Gulf.

“A development that always benefits prices is the market turbulence that conflicts create,” Tonhaugen added.

Libyan oil guards halted exports from several main ports in a pay dispute on Monday.

Output from Kazakhstan’s giant Tengiz field was disrupted by a power outage on Jan. 17.

(Editing by David Goodman and Edmund Blair)

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Dollar steadies; euro hurt by vaccine delays and German business morale slump

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Dollar steadies; euro hurt by vaccine delays and German business morale slump 2

By Elizabeth Howcroft

LONDON (Reuters) – The dollar steadied, the euro slipped and riskier currencies remained strong on Monday, as currency markets were torn between optimism about U.S. stimulus plans, and the reality of slow vaccine rollout and the economic impact of lockdowns in Europe.

Market sentiment had turned more cautious at the end of last week as European economic data showed that lockdown restrictions to limit the spread of the virus hurt business activity, dragging stocks lower.

The safe-haven dollar declined gradually overnight, and riskier currencies strengthened. It then recovered some losses after European markets opened, and was at 90.224 against a basket of currencies at 1152 GMT, flat on the day.

On one hand, market sentiment is supported by hopes for President Joe Biden’s $1.9 trillion fiscal stimulus plans, as well as the expectation that central banks will continue to provide liquidity.

But, in Europe, the extent of the risk appetite was limited by a lack of progress in rolling out the COVID-19 vaccine as well the economic impact of lockdown measures.

German business morale slumped to a six-month low in January, surprising market participants who had expected the survey to show a rise.

“It’s very much a case of hopes for the future against the reality of the first quarter of this year which is going to still prove to be fairly troubled,” said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.

“For now at least, the optimism that we’re hoping for has been somewhat delayed and that has taken a little bit of steam out of the euro and just put a little bit of support back in the dollar but ultimately I think it is still a case of those high-beta commodity currencies, reflation currencies, will continue to perform well,” he said.

Analysts expect a broad dollar decline during 2021. The net speculative short position on the dollar grew to its largest in ten years in the week to Jan. 19, according to weekly futures data from CFTC released on Friday.

The U.S. Federal Reserve meets on Wednesday and Fed Chair Jerome Powell is expected to signal that he has no plans to wind back the Fed’s massive stimulus any time soon – news which could push the dollar down further.

“The process of tapering QE is likely to be a gradual process which could last throughout 2022, and then potentially be followed by the first rate hikes later in 2023,” wrote MUFG currency analyst Lee Hardman.

“In these circumstances, we continue to believe that it is premature to expect the US dollar to rebound now in anticipation of policy tightening ahead, and still see scope for further weakness this year,” he said.

The euro was down around 0.1% against the dollar, at $1.2153 at 1207 GMT. At the European Central Bank meeting last week, President Christine Lagarde said the bank was closely watching the euro. The euro surged 9% last year versus the dollar and reached new two and a half year highs earlier in January.

But despite this verbal intervention, traders remain bullish on the euro, expecting the bar for a rate cut to be high.

Elsewhere, the Australian dollar, which is seen as a liquid proxy for risk, was up 0.2% at 0.7726 versus the U.S. dollar at 1208 GMT.

The New Zealand dollar was up 0.5%, while the commodity-driven Norwegian crown was up 0.2% the euro.

The safe-haven Japanese yen was flat on the day at 103.815 versus the U.S. dollar.

Graphic: USD, https://fingfx.thomsonreuters.com/gfx/mkt/qmypmyjdxpr/USD.png

(Reporting by Elizabeth Howcroft, editing by Ed Osmond and Chizu Nomiyama)

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Hong Kong’s Cathay Pacific warns of capacity cuts, higher cash burn

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Hong Kong's Cathay Pacific warns of capacity cuts, higher cash burn 3

(Reuters) – Cathay Pacific Airways Ltd on Monday warned passenger capacity could be cut by about 60% and monthly cash burn may rise if Hong Kong installs new measures that require flight crew to quarantine for two weeks.

Hong Kong’s flagship carrier said the expected move will increase cash burn by about HK$300 million ($38.70 million) to HK$400 million per month, on top of current HK$1 billion to HK$1.5 billion levels.

Hong Kong is set to require flight crew entering the Asian financial hub for more than two hours to quarantine in a hotel for two weeks, the South China Morning Post reported last week, citing sources.

“The new measure will have a significant impact on our ability to service our passenger and cargo markets,” Cathay said in a statement, adding that expected curbs will also reduce its cargo capacity by 25%.

The airline, in an internal memo seen by Reuters, requested for volunteers among its crew who could fly for three weeks, followed by two weeks of quarantine and 14 days free of duty, adding it will be a temporary measure and not all its flight will require such an operation.

“We continue to engage with key stakeholders in the Hong Kong Government,” the memo said.

In an emailed response to Reuters, a Hong Kong government spokesperson said: “In the light of the evolving pandemic situation locally and internationally, the Government will keep reviewing and refining the arrangements applicable to different categories of exempted persons, including air crew, with reference to all relevant considerations.”

Separately, a company spokeswoman said the airline could not detail the impact on vaccine transport specifically in terms of cargo shipments.

The aviation industry has been hit hard by the COVID-19 pandemic as many countries imposed travel restrictions to contain its spread.

In December, Cathay’s passenger numbers fell by 98.7% compared to a year earlier, though cargo carriage was down by a smaller 32.3%.

(Reporting by Shriya Ramakrishnan in Bengaluru; Additional reporting by Jamie Freed in Sydney and Twinnie Siu in Hong Kong; Editing by Bernard Orr, Arun Koyyur and Mark Potter)

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