Loan Guarantee Scheme - How it Works

1 December 2005 saw a relaxation of the rules for qualification for the Government’s Small Firm Loan Guarantee scheme (SFLG), aimed at giving further assistance to small- and medium-sized firms in overcoming obstacles to obtaining finance.

To qualify for a loan under the SFLG, the business must have a turnover of not more than £5.6m per year. The maximum loan available under the scheme is £250,000 for all enterprises. Prior to December 2005, loans above £100,000 had only been available to businesses that had traded for 2 years or more.

The SFLG is  only available to firms which have been trading for less than 5 years. There are several restrictions on the types of trade which can qualify for an SFLG loan.

An SFLG loan covers 75 per cent of the lender’s exposure, in return for which the borrower pays the Department of Trade and Industry a premium of 2 per cent. It is a little-publicised feature of SFLG loans that the guarantee only comes into effect when all other forms of security (e.g. guarantees from directors) have been called upon.

The guarantee under the SFLG is widely thought to be for the borrower, but it is in reality a guarantee for the lending institution, which allows it to reduce its risk in financing transactions which would be too risky to meet normal lending criteria. The payment of the premium adds additional commercial risk for the borrower. While the liberalisation of the SFLG scheme is to be welcomed by entrepreneurs, careful thought should be given to the appropriate commercial structure and risk analysis of any project requiring finance and professional advice taken with regard to the lending terms.

Business Link has a guide to the LGS  which is a useful first step to deciding if an application should be made.