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Small Firms Loan Guarantee Scheme (SFLG)

Written by: John Courtney

The Small Firms Loan Guarantee scheme - SFLG -has been in existence to enable small businesses with a viable business plan, but lacking security, to borrow money from approved lenders. The Small Firms Loan Guarantee scheme (SFLG) is a joint venture between the DTI and the approved lenders.

The scheme will provide loans between 5000 and 100,000 for companies with a trading record of less than 2 years and this amount is increased to 250,000 for the older businesses. The DTI do not lend the money as they leave the commercial decision to the bankers.

The borrowers are not asked to provide personal guarantees although any personal security will be requested by the bank prior to a SFLGS application being considered. The DTI will provide 75% of the security to the bank on acceptance by them of the application. Certain businesses are not available for the loan and companies with more than 200 employees are not eligible. Turnover in the prior year to the application must be below 5m for manufacturing industries and 3m for all other businesses. In addition a premium on the amount outstanding is charged by the bank.

NOTE: Changes to the Small Firms Loan Guarantee scheme (SFLG) came into effect from 1 April 2003 meaning that more businesses may be eligible. The changes include:

- A single guarantee rate of 75% for all new loans;

- Sector exclusions removed for retailing, catering, coal, hairdressing and beauty parlours,

- The maximum turnover level for non-manufacturing businesses increased from 1.5m to 3m;

- The premium paid by the borrower set at 2% per year on the outstanding balance for all new loans.

Changes may continue to be introduced by Government, and Strategy Consulting Ltd are happy to advise on the current situation.

The importance of a carefully prepared business plan is often under-estimated. The borrower must convince the potential lender that he or she has a viable business proposal. There is a need for a specialist funding plan to be created identifying closely the compliance with the requirements of the scheme and the banks and our consultants have wide experience in meeting these needs. A potential lender would expect to see information on:

- Management: key personnel, their experience, knowledge of the industry, age, education and training;

- Product or service: details of product or service on offer, state of product development, any follow-up products or services;

- Markets: description of the market and its size, customers, competitors, sales estimates and expected market penetration. Sales forecasts should be supported by hard evidence and research wherever possible. Also an explanation of how the business will succeed in the market against competition;

- The business: when started, results to date, borrowing history, existing commitments, current bankers;

- Objectives and Strategy: business objectives, timetable and assumptions, risk factors, longer term plans;

- Financial Projection: projections of at least one year's future performance together with supporting assumptions and evidence (order books, customer enquiries). Projections should include profit and loss account, monthly cash flow projections, balance sheets and capital expenditure budget;

- Finance Required: total funding required based on projections, application of those funds, repayment assumptions. Purpose of finance, detailing capital expenditure;

- Security Available: what assets are available as security (personal assets as well as business assets). Also what assets have been used as security elsewhere;

- Management Information Systems: accounting systems used by the business, ability to produce regular management accounts;

- Principal Risks: most likely areas of risk and ability to cope with these. What happens in event of sickness or injury to key personnel?

About the author:

John Courtney AIMC, MABS, MInstDis, is the managing director of Strategy Consulting Limited (http://www.strategyconsultinglimited.co.uk). Having trained at The Academy of Business Strategy, and is an associate of the Institute of Management Consultancy and a member of the Institute of Directors, he is also a visiting lecturer on the MBA course at Cranfield University School of Management and a Judge in The National Business Awards

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