The Enterprise Financial Guarantee (EFG) - Same Banks - Same Fraud

The EFS was introduced in November 2008 to replace a previous scheme, the Small Firms Loan Guarantee, and help banks lend to businesses that would not normally qualify for a loan due to a lack of sufficient security. Unfortunately it introduced a number of subtle but important changes which, have a profound impact when things go wrong. Now personal guarantees are permitted (except for the family home which is now exempt) and there is a cap on the amount of lending the government allows which is covered by the EFG.

To protect and encourage the banks the government agrees to underwrite 75% of the borrowing requirement should the business fail. To qualify for the EFG, companies have to meet the banks’ normal lending criteria apart from the security aspect. So the banks insist on a personal guarantee should the company fail but they don’t have sufficient security.

A key difficulty that still surrounds the EFG is the fact that, in many cases, the banking staff don't understand the scheme when introducing the EFG to a company director. Typically the ‘borrower’ is told that if the company ‘goes bust’ the director is covered for up to 75% of the borrowing. This is not true, as the government makes it very clear that anyone taking out any borrowing, including an EFG, is liable for 100% of the loan if the company fails. The bank must first pursue the ‘borrower vigorously’ via any personal guarantee, before any claim can be made to the government.

Only once this vigorous vetting has taken place, can the bank make a claim to the government to step in to pay 75% of the loan. So if you have personal assets outside of the family home, these will be vulnerable if the company is liquidated - the bank will throw your family on the road to get their money plus crippling charges.

Confusion also arises due to the cap on the amount the banks claim as a percentage of their overall lending portfolio (9.75%). A bank may not know at the time of the company insolvency whether it can make a claim or not against the government scheme because if the cap has already been reached this can prevent the bank reclaiming back the loan. This should not happen, but, in practical terms, it varies how vigorously the director will be pursued - banks will charge what they can get away with - remember the write's the contract!