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].
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.
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“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:
- 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.
- 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.
- 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.
- 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.