Last month I reported the results from the recent roundtable of industry specialists who gathered at Simply Business offices: four recommendations that would improve the UK’s Small Firms Loan Guarantee Scheme (or SFLG).
1. Revoke the 5-year limit age limit on borrowing companies
2. Increase the guarantee to 85% for smaller loans.
3. Establish clearer guidelines for eligibility.
4. Allow SFLG lenders to seek a personal guarantee.
I also suggested that a more radical and more effective alternative was possible. This would involve transforming the SFLG scheme into a system much like the United States Small Business Administration’s flagship 7(a) Loan Guarantee Programme.
The SBA-backed scheme is by far the world’s most successful, with over 88,895 loans outstanding totaling over $14 billion – or 15 times the amount outstanding under the SFLG. Remarkably, the SBA scheme is also self funding with virtually no government subsidy.
Creating such a success in the UK -- in addition to the above modifications – would require some fundamental changes:
1. Move the determination of eligibility to the lenders. If there are clear and concise guidelines (as above) there should be no ambiguity about whether a particular company is eligible or not. Such determination can take weeks under the SFLG. Such delays and uncertainties increase hassles for both SFLG lenders and borrowers. By contrast, the SBA monitors and vets lenders -- not individual borrowers – a much more efficient way of administering such a programme.
2. Broaden eligibility for the scheme. The SFLG bills itself as “lender of last resort”. By contract, the US proudly boasts its role as “lender of first resort”. Almost every small business in the US is eligible to participate. Getting an SBA-backed loan depends simply on finding one of 5,000 SBA-authorised lenders who is willing to risk loosing the 20% portion of a loan that is not guaranteed. This diversifies the portfolio so that most borrowing businesses are good credit risks.
3. Require a personal guarantee for every loan. The current SFLG scheme does not allow personal guarantees. The US scheme requires them for every loan. That is a key reason the US scheme has a default rate that is probably about one-sixth that of the SFLG.
4. Allow SFLG lenders to seek collateral. The SFLG does not currently allow borrowers to pledge collateral to secure the loan. This fact, combined with the lack of personal guarantee, significantly increases the risk profile of a typical SFLG loan. By contract, SBA lenders can accept virtually any asset as security – just like any other commercial loan.
5. Impose a maximum interest rate. There is technically no limit to the rate charged under the SFLG. SBA loans over $50,000 are capped at 2.75% over the prime rate. This cap both encourages lenders to take only prudent credit risks and reduces the cost of the programme for SBA borrowers.
The UK should learn from the enormous success of the US programme and adopt the above. They are radical changes, but changes that would also dramatically improve access to finance for UK businesses without additional cost to the UK taxpayer.