What is the Enterprise Finance Guarantee (EFG)?
The Enterprise Finance Guarantee (EFG) is a financial scheme launched by the UK government to support small and medium-sized enterprises (SMEs) requiring additional finance to operate or expand. Under the EFG scheme, the government guarantees 75% of a company’s overdraft, provided the company pays an annual premium of 2%. Despite the government guarantee, the borrower remains responsible for repaying 100% of the loan.
Key Features of EFG:
- Eligibility: Available to UK companies with an annual turnover of no more than £41 million.
- Guarantee: The UK government guarantees 75% of the loan amount.
- Premium: Borrowers pay a 2% annual premium to secure the guarantee.
- Liability: Borrowers are responsible for repaying the full loan amount.
- Scheme Initiation: EFG replaced the Small Firms Guarantee Scheme in January 2009, offering broader eligibility criteria.
Examples of EFG Use:
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Acme Manufacturing Ltd: A small manufacturing firm with an annual turnover of £30 million taps into the EFG to secure a £1 million overdraft. The government guarantees 75% of the overdraft, helping the company secure essential working capital while it pays a 2% annual premium.
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Tech Start Up Co.: A tech startup in its growth phase with a turnover of £5 million utilizes the EFG to obtain a £500,000 loan. The government’s guarantee helps in securing the loan, allowing the company to invest in new technology and hire additional staff.
Frequently Asked Questions:
Q1: Who qualifies for the Enterprise Finance Guarantee?
Any UK-based company with a turnover not exceeding £41 million qualifies for the EFG. This includes sole traders, partnerships, or other business entities.
Q2: What is the maximum loan amount under the EFG scheme?
While there isn’t a specific maximum loan amount, the EFG is typically used for loans ranging from £25,001 to £1.2 million.
Q3: Does the EFG cover both overdrafts and loans?
Yes, the EFG can cover term loans, overdrafts, invoice finance, and asset finance facilities.
Q4: Are personal guarantees required under the EFG?
Personal guarantees may be required by lenders as per their own lending policies, although the EFG itself provides a government-backed guarantee.
Q5: What happens if the business defaults?
In case of a default, the lender is able to claim the 75% guarantee from the government. However, the business remains liable for the full 100% repayment of the loan.
- Overdraft: A facility provided by banks allowing businesses to withdraw more money than is available in their account up to a specified limit.
- Small Firms Guarantee Scheme: The predecessor to the EFG, offering limited eligibility and less extensive support.
- Term Loan: A loan provided for a fixed amount and repayable over a predetermined period, commonly supported by EFG.
Online Resources:
Suggested Books for Further Studies:
- “Finance for Small and Entrepreneurial Businesses” by Richard Roberts - A comprehensive guide on securing finance for small businesses in various stages of growth.
- “The Financier’s Guide to the UK SME Market” by Peter Temple - Insights into the financial markets related to SMEs, including funding mechanisms like EFG.
- “Small Business Financing: How and Where to Get It” by Charles H. Green - In-depth approaches to securing finance for small businesses, with practical examples.
Accounting Basics: “Enterprise Finance Guarantee” Fundamentals Quiz
### Does the Enterprise Finance Guarantee (EFG) scheme replace the Small Firms Guarantee Scheme?
- [x] Yes, the EFG replaced the Small Firms Guarantee Scheme in January 2009.
- [ ] No, they are two separate schemes running concurrently.
- [ ] Only partially, with some aspects retained.
- [ ] It has nothing to do with the Small Firms Guarantee Scheme.
> **Explanation:** The Enterprise Finance Guarantee scheme replaced the Small Firms Guarantee Scheme from January 2009, offering broader eligibility criteria and more extensive support.
### What percentage of the loan does the UK government guarantee under the EFG?
- [x] 75%
- [ ] 50%
- [ ] 80%
- [ ] 100%
> **Explanation:** Under the EFG scheme, the UK government guarantees 75% of the loan amount, providing banks with more confidence to lend to smaller companies.
### On what condition can a borrower still be responsible for 100% of the loan repayment despite the government guarantee?
- [x] The borrower is always responsible for repaying 100% of the loan.
- [ ] The borrower is responsible only if the business fails.
- [ ] The borrower never has to repay more than 25%.
- [ ] The borrower is responsible if premium payments are missed.
> **Explanation:** Despite the government guaranteeing 75% of the loan, the borrower remains liable for repaying the full 100% of the loan amount.
### What annual premium must borrowers pay under the EFG?
- [ ] 1%
- [x] 2%
- [ ] 3%
- [ ] 5%
> **Explanation:** Borrowers need to pay a 2% annual premium to secure the government guarantee under the EFG scheme.
### Who is eligible for the EFG scheme?
- [x] Any UK company with a turnover of no more than £41 million.
- [ ] Only newly established businesses.
- [ ] Any UK company irrespective of turnover.
- [ ] Only non-profit organizations.
> **Explanation:** The EFG scheme is available to any UK company with an annual turnover not exceeding £41 million.
### What types of loans can be covered under the EFG?
- [ ] Only term loans.
- [x] Term loans, overdrafts, invoice finance, and asset finance.
- [ ] Only overdrafts.
- [ ] Only invoice finance.
> **Explanation:** The EFG scheme can cover a range of financial facilities, including term loans, overdrafts, invoice finance, and asset finance.
### What previous scheme was replaced by the EFG?
- [ ] SME Development Scheme
- [ ] Business Expansion Scheme
- [x] Small Firms Guarantee Scheme
- [ ] Regional Growth Fund
> **Explanation:** The Small Firms Guarantee Scheme was replaced by the Enterprise Finance Guarantee in January 2009.
### What assistance does the EFG provide to the lenders?
- [ ] Complete repayment of loans.
- [ ] Subsidies for interest rates.
- [x] A guarantee that covers 75% of the loan amount.
- [ ] Legal advisory services.
> **Explanation:** The scheme assures lenders by providing a 75% guarantee on the loan amount, making them more likely to approve financing.
### Is the EFG scheme limited to a specific industry?
- [ ] Yes, only manufacturing businesses.
- [ ] Yes, only technology-related businesses.
- [ ] Yes, only service sector businesses.
- [x] No, it is open to various industries.
> **Explanation:** The EFG scheme is not restricted to any specific industry and is available to enterprises across various sectors, provided they meet the turnover criteria.
### What is the primary purpose of the EFG scheme?
- [ ] To subsidize business insurance premiums.
- [ ] To offer interest-free loans to businesses.
- [x] To facilitate access to finance for smaller companies.
- [ ] To provide grants for innovation.
> **Explanation:** The main aim of the Enterprise Finance Guarantee scheme is to facilitate access to finance for smaller companies by providing a government-backed guarantee to lenders.
Thank you for engaging with this detailed exploration of the Enterprise Finance Guarantee and tackling our sample quiz questions. Keep advancing your financial acumen!
