Enterprise Finance Guarantee scheme – spinning out of control?

As we reach the bottom (hopefully) of a credit and bank induced recession, most small businesses want some straight talking.

Straight talking about late payments. Straight talking about cash-flow. Straight talking about the cost of legislation. And straight talking about lending.

When it comes to the government’s £1.3 billion Enterprise Finance Guarantee (EFG) scheme designed to prop up bank credit to SMEs, getting straight answers can sometimes prove tricky, no matter who you talk to.

Time for straight talking about lending to UK small businesses

Media Spin

Take the Daily Telegraph this morning. Its business section slams the EFG for not meeting government targets for lending to SMEs and failing to meet levels achieved a year ago by the Small Firms Loan Guarantee (SFLG) scheme.

The problem is the newspaper seems to bend the facts to suit its story.  Firstly, why does it only use figures for EFG lending to end March 2009 when figures to end June or even into July are readily available?

The answer may lie in the fact the complicated EFG scheme didn’t come into force until 15th January. This gives the previous year’s figures an additional 15 days’ worth of lending to assist in making the Telegraph’s case.

How much lending was made under the SFLG during the first 15 days of the year is not made clear, but it would be surprising if volumes were significant bearing in mind the scheme was about to be superseded.

So, let’s divide the figure for SFLG lending in Q1 2008 (£205 million) by the 90 days of a full first quarter to get a daily lending figure of £2.28 million.

Let’s do the same for EFG lending in Q1 2009 (£177.8) taking 15 days away from the 90 days of a full first quarter to get a daily lending figure of £2.37 million.

Hmmm … an increase in lending to SMEs which could blow the story out of the water.

Government Spin

The government’s been spinning the EFG too.  Hardly surprising with the master of media management, Lord Mandelson, at the helm in the Department for Business.

For several months the Department was putting out press releases dramatically talking up the numbers in relation to the EFG by being economical with the full facts.  Here’s an example from the end of April:

More than 2,500 eligible loans worth almost £290m have now been granted, or are being processed or assessed to assist businesses’ lending needs via the Government’s EFG scheme.

This is as good as meaningless.  Applications ‘being processed or assessed’ may not end up receiving the offer of a loan at all.

What we need to know is how much has been actually granted as a loan. After some questioning, the Department did start to release more specific figures.

And the figures to the beginning of July show total lending after nearly six months of the 15 month scheme reaching £364 million. On course for £1 billion by the end of March 2010, but some £300 million short of the total allocated.

The Federation of Small Businesses and British Chambers of Commerce say they want to keep up the pressure to make sure lending keeps flowing.  That’s a good thing.

But you might well ask, if small businesses gain in confidence as recession eases, then perhaps demand for EFG lending will slow. Banks not being able to lend the full £1.3 billion by the Q1 deadline next year, may actually prove to be a positive sign for the economy.

Bank Spin

Until then the banks are in a race to prove they are lending more than anyone else to small businesses.

They have their battered images to rebuild and being nice to SMEs right now is vital, although their battered balance sheets may also be a powerful disincentive to lend willy-nilly to meet government targets.

The part-nationalised RBS and Lloyds TSB have quotas to fulfil in terms of the volume of loans they need to place under the EFG.  Their hands are forced.

So how much are the big four lenders (who account for 90% of the SME banking market) really lending under the EFG? SmallBizPod has managed to extract the following figures from the major banks for the period up until the beginning of July:

Barclays = £150 million
HSBC = £40 million
Lloyds TSB = £91 million
RBS/NatWest = £190 million

This totals £471 million.  The eagle-eyed among you will notice the official figures I mentioned earlier total £364 million for the same period.

So where’s the extra 30% or so come from? Well, it’s down to the banks wanting to make the highest possible figures public by quoting (in some cases) the latest sums ‘granted and in the pipeline’.

Back to straight talking

When all said and done, what matters is whether viable small businesses have access to lending when they need it and under what terms.

For example, where no other security is available, personal security is still often required by banks under the EFG, contrary to some suggestions when the scheme was launched.

With the trend in house prices down, this may be a more important restricting factor for many than the volume of lending available itself.

Alex is the founder and editor of SmallBizPod, the UK's first podcast dedicated to small business, start-ups and entrepreneurship. Alex writes about topical small business issues, entrepreneurs and anything else that catches his eye here on the small business blog. http://www.smallbizpod.co.uk