Recently Xbridge’s online marketplace business, Simply Business, held a roundtable conference to discuss the UK’s Small Firms Loan Guarantee Scheme (or SFLG). The SFLG scheme was reviewed in 2004 by the National Audit office, when it suggested 38 changes to the scheme to improve both its application and performance. All 38 were implemented in December 2005, so on the anniversary we invited a panel of industry specialists to review the effect of the changes on the scheme
Our participants included: Mike Cherry of the Federation of Small Business; Paul Coleman of Finance South East; Ian Patterson of Lloyds TSB Business Banking; Bob Lefroy of Business Money; and Alex Ball, who was involved in the origination of the very first scheme that preceded the current Small Firms Loan Guarantee programme.
My sincere thanks to each of these participants for donating their time to this important topic. A summary of the roundtable’s conclusions are outlined below:
1. Revoke the 5-year limit. All participants agreed that placing an arbitrary 5-year limit on the age of companies eligible for the scheme significantly limited its purpose: to promote an enterprise culture in the UK. The 5-year limitation was a December 2005 change to the SFLG scheme. Everyone agreed that it should not have been implemented.
2. Increase the guarantee to 85% for smaller loans. The comparable US programme guarantees 85% of the loan up to $250,000 maximum, compared to the UK’s 75%. Most participants agreed that UK taxpayers would receive good “value for money” with such an enhanced guarantee. Lenders would be able to lend more because their risk would be reduced by 40% on these loans, and this would encourage the formation of new business.
3. Establish clearer guidelines for eligibility. Most agreed that current eligibility rules are confusing for both borrower and lenders. Much time is often wasted during the SFLG application confirming that a business is eligible. Clearer, simpler guidelines would reduce potential for confusion for both lender and borrower, making the programme more attractive to both.
4. Allow SFLG lenders to seek a personal guarantee. SFLG lenders are not currently allowed to seek a personal guarantee from the borrower. This point was a bit more controversial, but most agreed that having “a bit of skin in the game” would reduce the SFLG’s notoriously high default rate, enabling the government to loosen other lending requirements and therefore provide more guaranteed funding. The roundtable participants discussed limiting the personal guarantee such that it excludes the entrepreneurs’ home. This is similar to the level of protection and commitment between a lender and borrower on most loans in the US.
The above recommendations would significantly improve the current SFLG programme and would better promote an enterprise culture in the UK.
I am not, however, convinced that the above steps go far enough. In next months column I plan to suggest a more radical and I believe more effective alternative to the current SFLG scheme.