What is an Enterprise Finance Guarantee Loan?
An Enterprise Finance Guarantee Loan (more commonly known as an EFG Loan) is a Government scheme which was launched in January 2009 to encourage Banks to loan to Small and Medium sized businesses (SME) following the Credit Crunch.
Under an EFG Loan the Government would agree to act as a guarantor for up to 75% of the finance loaned. Therefore if the borrowing SME defaulted then the Bank would only stand as little as 25% of the loan, few exceptions apply. The ultimate decision of whether or not to lend would still rest with the Bank and the government required them to only lend to viable SMEs. At the time the Banks had come under criticism for refusing to lend to almost all SMEs, therefore the EFG scheme aimed to greatly increase the number of loans provided by reducing the risk to the Banks.
It is important to note that the SME would still be liable for the full loan and interest. The Government scheme provided a guarantee to the Bank and not the SME. If the SME defaulted on the loan, then the Bank was still expected to take all necessary action against the SME, such as taking legal action and/or realising any collateral provided.
If a loan was provided then the SME would pay an additional premium to the Government on top of the interest due to the Bank.
How can an Enterprise Finance Guarantee Loan be mis-sold?
The EFG loan scheme was a very appealing proposition for the Banks. Under conventional lending, the monies recovered following proceedings or realising collateral (if any), could be insufficient – giving a shortfall.
Under an EFG loan the Bank’s maximum exposure was limited to 25% of whatever was remaining on the loan. Further the Bank was still entitled to place conditions on the loan, such as requiring collateral, effectively giving the Bank two opportunities to recover funds.
An SME would be looking to lend money as cheaply as possible. An EFG loan attracted an additional premium payable to the Government and provided no direct benefit to the SME if other options were available.
This creates a potential conflict in which the Bank would prefer the SME to obtain an EFG loan whereas in most cases the EFG loan should have been the loan of last resort.
When the EFG loan scheme was initially set up there were issues in how banks were advertising the EFG loans to their customer base. It was not uncommon for the SME to be led to believe that the Government guarantee was for the benefit of the SME and not the Bank. Consequently, the SME would believe that the premium acted as an insurance to cover the SME in the event that they could not meet repayments. The SME’s belief was that 75% of the default would be covered allowing them to make an arrangement to cover the remaining 25%.
The reality is that the SME was always fully liable for 100% of the EFG loan. Further to this, in order for the bank to be able to claim the 75% from the Government it had to satisfy the Government that it had taken steps to mitigate its loss.
The consequence of this requirement for the Bank to mitigate its loss was that the Bank would pursue any EFG loan defaults quite vigorously. Such pursuit could include but not limited to taking insolvency action against the defaulting SME.
This had the practical effect of the SME suffering twofold due to the Bank’s failure to give appropriate advice. Not only would the SME not be protected in the event that they defaulted, but the Bank was incentivised to ensure that any defaults were pursued to conclusion.
What does this mean for me?
If you have an EFG loan then it is important to establish what you knew about the loan at the time that the same was taken out.
If you believe that the true costs vs benefits of the loan were not properly explained to you, or that you were misled into believing that the loan insured you against defaulting, then you may have a claim that your EFG loan was mis-sold.
In respect of remedy available to you this would depend on the individual circumstances and whether or not you have or are likely to default on the loan.