A multi-billion pound aid package designed to help small businesses through the financial crisis has been unveiled by the Government.
Below is an outline of the options available:
Working Capital Scheme (WCS)
In the Pre Budget Report (PBR), the Chancellor announced a guarantee scheme to support a £1bn facility for smaller exporters to access short term working capital. This has been expanded to cover a wider group of businesses and lending, including exporters.
Under the Working Capital Scheme, banks will submit a portfolio of loans to businesses (lending to businesses with turnover up to £500m) to the Department for Business & Regulatory Reform (BERR). BERR will guarantee up to 50 per cent of the value of the portfolio, securing up to £20bn of bank lending.
Banks are invited to submit their portfolio of existing and projected new or refinance loans for approval under the guarantee. Declarations of interest have been received by Barclays, HSBC, Lloyds TSB and RBS. With the support of participating banks, BERR hopes the first £1bn guarantee tranche of the scheme should be operational by 1 March 2009.
By guaranteeing portfolios of working capital facilities, this package will release capital held by the banks against these portfolios. The banks have agreed they will make commitments to re-deploy this capital in order to increase all types of lending above their current plans, to businesses with a turnover of less than £500m. The £10bn injection to banks represents a guarantee to enable them to free up working capital to sustain existing loans and create new ones. A condition of banks getting the money will be that they negotiate with the government on what capital will be freed up. Some of the capital made available as a result of the guarantee has to be used for new lending. There will inevitably be some defaulting on loans therefore £225m has been put aside to cover repayments that will not be made.
Banks will pay a premium to BERR for this facility; pricing is to be agreed with the banks at the time a portfolio of loans is offered. Pricing will reflect the risk characteristics of the portfolio, to cover potential default payments.
The Working Capital Scheme is subject to EU State Aid Clearance.
Summary of Eligibility
Company size:
small and medium-sized businesses with turnover up to £500m.
Company type:
innovative, viable and growing companies that are finding it difficult to access working capital.
Enterprise Finance Guarantee
Description
This builds on the £1bn Small Business Finance Scheme outlined in November’s PBR. It is a guarantee facility for small businesses intended primarily to improve the availability of working capital through term loans and the consolidation of overdrafts. It will also support lending for business growth and development in cases where a sound proposition may otherwise be declined due to a lack of security. The banks must certify that these loans are in addition to loans that they would otherwise make.
The guarantee will cover the following types of lending:
new term loans (with terms of between one and ten years)
existing lending where lenders might not otherwise refinance the debt
conversion of part or all of an existing utilised overdraft into a term loan in order to release capacity in the overdraft to meet working capital requirements (conditional on the lender being prepared to continue to provide an overdraft and the serviceability of both the term loan and the overdraft)
The guarantee will fund:
working capital
investment by businesses seeking to grow or develop
In addition to regular capital and interest payments to the lender, and any arrangement fee which they may charge, a premium is payable to BERR.
The premium is equivalent to two per cent per annum on the outstanding balance of the loan, assessed and collected quarterly in advance throughout the life of the loan.
A discount of 25 per cent will be applied to all premiums due and successfully collected during 2009.
Delivery of the Enterprise Finance Guarantee, including the decision on whether or not it is appropriate to use it in connection with any specific lending transaction, is fully delegated to the participating lenders. There is no automatic entitlement to receive a guaranteed loan and nor is there any pre-qualification process for it.
The following main lenders will lend to eligible businesses under Enterprise Finance Guarantee:
HSBC
Barclays
Clydesdale/Yorkshire Bank
HBOS
Lloyds TSB
RBS/Natwest
It is likely that a significant number of existing smaller SFLG lenders will become lenders under Enterprise Finance Guarantee in due course.
Value
Up to £1.3bn of new bank lending will be guaranteed by the Government.
Eligible businesses are able to borrow between £1,000 and £1,000,000 when this would not otherwise have been possible.
Eligibility
Small businesses in the UK with an annual turnover of up to £25m are eligible.
Loans for most businesses purposes to businesses in most sectors are eligible. The principal exclusions relate to businesses in the agriculture, coal, and steel sectors, and to the financing of individual export orders. Individual lenders will advise if any of these restrictions affect a business when the loan application is considered.
Additional Info
Products and services in the Solutions for Business portfolio are designed to help qualifying businesses grow and succeed. Enterprise Finance Guarantee has replaced the Small Firms Loan Guarantee (SFLG) scheme (note that eligibility for the EFG is expanded from the previous scheme). Please see P5 for further details of SFLG.
Summary of Eligibility
Company size:
small, viable and creditworthy businesses with annual turnover up to £25m
Company sector:
most eligible with the exception of agriculture, coal and steel and financing of individual export orders
Types of lending:
-New term loans
-Existing lending
-Conversion of part or all of an existing utilised overdraft
Value of loan:
eligible businesses can borrow between £1,000 and £1,000,000 to be used for working capital or new investment
N.B. All lending decisions are at the discretion of the bank supplying the loan
Capital for Enterprise Fund
The Capital for Enterprise Fund will provide £75m of equity, made up of £50m from Government funds and £25m from high street banks (Barclays, HSBC, Lloyds TSB, and RBS) to invest in small businesses which need equity for working capital and investment.
The externally-managed fund will invest in companies with high levels of existing debt. It will provide equity and quasi-equity of £250,000 and £2,000,000 for companies with turnover of up to £50m which have viable business models and growth potential and are in need of long term capital.
Summary of Eligibility
Company size:
small businesses with turnover of up to £50m
Type of company:
viable business models and growth potential
Types of financing:
long term capital: equity and quasi-equity
Value of investment:
£250,000 and £2,000,000
Small Firms Loan Guarantee (now replaced by the Enterprise Finance Guarantee)
Small to medium-sized enterprises, may have had viable business plans requiring funding, and for which a loan would be appropriate. However, they may have been unable to obtain a conventional loan because they did not have assets to offer as security. The Small Firms Loan Guarantee (SFLG) helped to overcome this by providing lenders with a government guarantee against default in certain circumstances.
The SFLG was a joint venture between the Department for Business, Enterprise and Regulatory Reform (BERR) and a number of participating lenders. Participating lenders administered the eligibility criteria and made all commercial decisions regarding borrowing.
The main features and criteria of the scheme were:
A guarantee to the lender covering 75 per cent of the loan amount, for which the borrower paid a 2 per cent premium on the outstanding balance of the loan, payable to BERR
the ability to guarantee loans of up to £250,000 and with terms of up to ten years
availability to qualifying UK businesses with an annual turnover of up to £5.6million
availability to businesses in most sectors and for most business purposes, although there were some restrictions
For further information and advice please contact Paul Stringer on 0161 827 1201 or by email to paul.stringer@cowgills.co.uk