In January this year the UK government introduced the Enterprise Finance Guarantee scheme (EFG). The EFG replaced the Small Firms Loan Guarantee Scheme (SFLG) with the commitment to helping small businesses raise the funds they require to trade through the current economic downturn. Under the EFG the government guarantees up to 75% of the value of a commercial loan from the bank.
Despite the Governments claims that the EFG would be the cornerstone for businesses to trade out of the recession, companies are still struggling to raise vital finance with the support of the scheme. The Department for Business, Innovation and Skills have just published a report that says in the year up until the 3rd April 2009 a total of 2,369 loan guarantees to the value of GBP 178m had been issued, under both the Small Firms Loan Guarantee Scheme and the Enterprise Finance Guarantee scheme. This figure is significantly less than the GBP 205m guaranteed in the previous year. It is also far below the scheme's GBP 360m budget set by the Government in March 2008.
The current outlook for this financial year is equally worrying. The latest Bank of England figures show that new lending to companies continued to fall in May 2009, continuing on from in April. UK banks remain reluctant to provide businesses with new loan facilities despite the government backing. I have recently had a number of discussions with small business owners which back up this analysis. It seems common place that new loan and commercial mortgage applications with the backing of solid business plans are being consistently declined (often at the last minute) with little or no rational explanation from the lender.
Based on the current evidence it seems very much that the banking system is reluctant to back any business opportunity unless it has almost a cast iron prospect of success. This situation is certainly stifling entrepreneurial activity and thus undermining the driving force required to kick start the economy and move it out of recession.
In the light of this problem, business owners are well advised to consider alternative options for raising finance. Business refinancing can help in this area. Business refinancing generally involves raising cash secured against tangible business assets thus giving the bank real security and the comfort required to release funds. Examples of business refinancing include:
Asset refinancing
The process of borrowing against the value of any fixed assets which are owned by the business.
Invoice financing
The process of raising money based on a company's outstanding invoices. Invoice financing could allow a company to draw down up to 90% of the invoice value immediately on the issue of a valid invoice.
Trade financing
Enabling a business to receive up to 80% of the confirmed order value up front to pay the suppliers required to fulfil the order.
Until lending eases businesses will struggle to trade out of the current economic situation. However it seems that they are unable to rely on Government initiatives such as the Enterprise Finance Guarantee scheme to allow them to access the funds they need for expansion and growth. Business refinancing is unfortunately not the answer for all businesses. However, it is another option that should be considered when planning the best way of trading in the coming months.
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Derek Cooper is Managing Director of Cooper Matthews Limited http://coopermatthews.com and a member of the Turnaround Management Association UK.
With significant experience in working with small to medium sized businesses, Cooper Matthews specialise in providing straight forward insolvency advice for businesses with financial problems.
More expert advice on Business Refinancing issues http://coopermatthews.com/business-refinancing.html
