Refinancing business

Refinancing business – is the guarantee of corporate finance work?

The system of loan guarantees for small businesses (SFLG) was closed in January 2009 and replaced by the guarantee scheme of corporate finance (EFGS). The idea behind the EFGS (and even before the SFLG) is to stimulate lending to small and medium enterprises. Loans under this scheme are guaranteed by the government at 75% of the value of the loan. Directors of the Company will normally be required to personally guarantee the remaining 25%.

The economic downturn has of course left small businesses struggling with cash flow and turning to their banks for support. In this climate, initiatives such as EFGS are welcome. There is some evidence that the regime has had a positive impact and small business loans is increasing. A recent report published by the Department for Business, Innovation and Skills showed that in 3 years until the April 9, 2360 loan guarantees of £ 177.8m in total were issued under the guarantee loan scheme Small Business and Enterprise Finance Guarantee Scheme.


However, despite these numbers, loan guarantees in the year to April 3, 09 were less than 205 pounds secured the previous year. They are also much less than £ 360m budget plan set by the Government in March 2008. Unfortunately, research conducted by the Federation of Small Businesses suggests that smaller firms experiencing declining rather than improving the support of banks and the cost of loans and overdrafts remains restrictive. So it seems that small businesses struggle with cash flow that had high hopes of being eligible for loans under the EFGS when it was launched are missing out.

Of course, it is unreasonable for a bank to lend to a company that is not viable. In the current economic turbulence, companies need funding may be refused as banks are concerned that the company is not viable and will therefore default on the loan. Banks will naturally seek to ensure that a company can generate enough income to repay loans. This could include consideration of the company’s customers, the backlog and management accounts.

Obviously, if the business does not generate enough income to meet its current commitments, taking on additional borrowing will simply exacerbate the problem and therefore a decrease in lending by the bank is likely. However, many small businesses with loan applications are denied even if the business case stacks up. It seems that although banks are under pressure to lend, they adopt a policy of targeting the most profitable companies on their books, many of which do not necessarily need funding.

There is an argument that the guarantee scheme finances of public enterprises has been hampered by poor communication and the failure of the branch managers to advertise or offer. If more managers are made aware of the details of the system and the 75% guarantee by the government, perhaps it could reduce their reluctance to lend. However, the fact remains that the objectives for the volume of loans are not satisfied. It is the responsibility of banks to ensure that their employees are made aware of EFGS and how it can help protect their interests. But more than that, maybe the banks need to start changing their attitudes in terms of which companies are viable loan proposals. Unfortunately, the current definition of sustainability seems to remain a mystery.

Meanwhile, faced with this problem, business owners are well advised to consider alternative options for raising funds. Refinancing can help businesses in this area. Refinance companies usually involves raising cash secured by tangible assets thus giving real bank security and comfort needed to release the funds.

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