ENTERPRISE FINANCE GUARANTEE (EFG) Introduction • The Enterprise Finance Guarantee (EFG) was announced by HM Government in late 2008 as part of the measures to assist small & mediu m sized businesses. • The EFG was formally launched on 14 January 2009, at which time the Small Firms Loan Guarantee Scheme (“SFLGS”) was discontinued for new applications. • The EFG is designed primarily as a means of providing working capital to businesses, however loans can also be provided for other purposes such as asset purchase, business expansion or acquisition, or property/equipment purchase. • Applicat ions will be considered where a business has a viable proposal but may incur d ifficu lty in obtaining conventional finance because of lack of security. • The EFG is not restricted to established businesses. If a new start-up, with no/litt le available security, meets usual credit policy criteria and has presented a sound business plan, the Bank may still choose to support an EFG applicat ion. • Eligible businesses pay a premiu m to the Depart ment for Business Enterprise & Regulatory Reform (BERR). In return the Govern ment issues the lender with a guarantee. • The EFG is initially available until 31 March 2010 with any extension to this date being announced by the Govern me nt in due course. Main Princi ples • BERR requires that before sanctioning any facilities under EFG the Bank has confirmed the following: • the applicant’s plans are viable and would meet our usual co mmercial requirements for a loan. • the Bank would wish to lend to the applicant and that all the applicant’s available collateral has been exhausted. • EFG loans may be used to refinance existing overdraft borrowing (the current utilisation not the limit). The Bank must howe ver be prepared to continue to make available an appropriate working capital facility following the refinance; it is not permissible t o use EFG finance to simply term existing overdraft debt and not provide working capital finance. Eligibility • Businesses of any age may apply fo r EFG. • There is no maximu m number of emp loyees. • The applicant’s turnover during the previous 12 months must not exceed £25m. Where an applicant is part of a corporate grou p (whether a parent, subsidiary or holding co mpany), the £25m figure relates to t he entire group. • There are few sectoral restrictions although an eligib ility check should be undertaken in the event of a customer operating in any of the following sectors or in any other instances in the event of doubt:- • Fishing • Agriculture • Shipping • Forestry • Performing Arts • Education • Healthcare • Social Care Serv ices • Coal and Steel Purpose of Facility • EFG loans may only be used for business purposes, principally to provide working capital, or to fund expansion or capital expenditure in the UK. Other purposes such as acquisition/purchase of businesses, land/property purchase, and start -up costs are also permitted. • EFG loans may be used to refinance existing overdraft facilities afforded by the Bank. The Ban k must however continue to provide an appropriate working capital facility (i.e. continue to make available an overdraft) should existing borrowing be refinanced and the customer still wishes an overdraft. The level of any continuing overdraft is to be determined by the Bank in t hat it does not necessarily require to equal the amount of the overdraft wh ich is being refinanced by EFG. • EFG loans can be used to fund share purchases in respect of business acquisition transactions, subject to the Bank being sa tisfied that structuring the purchase in such a manner is appropriate. • EFG loans are available to businesses which export but may not be used to finance large individual transactions which would be more suited to Trade Finance facilities. • EFG finance may be used to refinance any loan facilit ies (apart fro m an SFLGS loan) where the Bank are facing such a large security shortfall that we have made a decision to call up the loan. Such instances will, however, be ext remely rare. However in a non-distress scenario, EFG finance cannot be used to refinance loans which we have afforded or loans which have been afforded by other lenders. EFG Parameters Borrowi ng Amount • The min imu m loan amount is £1,000 (£26,000 for Fixed Rate Loans). • The maximu m loan amount is £1m. • The loan amount must be in mult iples of £500. • Any loans previously provided under SFLGS, even if still outstanding, do not count towards the £1m EFG limit. • There is no restriction on the number of EFG facilities a customer may have so long as the aggrega te of these facilities (based on the original amount granted, not the current outstanding balance) does not exceed £1m. • Where more than one business wishes to apply for an EFG, each separate business may qualify for an aggregate amount of up t o £1m, prov ided that the applicant is not part of a corporate group and each separate business meets the elig ibility criteria. • Where an applicant is part of a corporate group (whether a parent, subsidiary or holding co mpany), the maximu m figure avail able to the entire group is £1m. Term • The min imu m term is 3 months. • The maximu m term is 10 years (including any capital repayment holiday). Drawdo wn • Tranche drawdowns are permitted, subject to a maximu m of four tranches. If the loan is to be drawn in tranch es, no capital repayments are to be made until the loan is fully drawn, wh ich must be within 1 year of the date of the EFG loan agreement. • The first tranche must be drawn no later than 6 months after the date of the EFG loan agreement. Failure to draw t he loan with in this period will necessitate the submission of a new application. Capi tal Repayment Holi days • Capital Repayment Holidays, in mult iples of 3 months, are permitted up to a maximu m of 3 years. • Subsequent Capital Repayment Ho lidays may be sanctioned after initial drawdown. Repayments • EFG loans must be repaid on a capital only (straight line) basis with interest being debited quarterly to a separate accoun t held at the same branch as the loan account. • Capital and interest loans (actuarial) or interest only (bullet) repayment loans are not permissible. • Loan repay ments may be monthly or quarterly. Security General • Before offering a borro wer an EFG facility, the Bank must be satisfied that it would have offered conventional fin ance but for the lack of security. Pledging of Personal Assets • The Bank must be satisfied that all availab le personal assets have been pledged for conventional facilit ies, before conside ring lending under EFG. • It is the Ban k’s decision as to whether or not personal assets may be considered available as security for conventional lending. • The Bank must be satisfied that the applicant is personally co mmitted to the venture, and is not using EFG as a means of av oiding pledging personal assets. • In the event that conventionally chargeable assets are jo intly owned with a spouse or third party who is not directly connected t o the business any refusal by that spouse/third party to charge those assets is sufficient to render these assets as not being available for conventional lending. For our purposes, a direct connection with the business is defined as partner, director or shareholder with 20% or mo re of the share capital. The same principle applies where an occupier of a conventionally chargeable asset refuses to grant consent to a charge. • If the applicant is not prepared to allow all their available personal assets to be used to secure conventional lending, th is renders them ineligible for EFG. • In exceptional circu mstances, personal guarantees may be taken in respect of EFG loans. • The Bank is not permitted to take a charge over guarantors’ principal residences in support of personal guarantees. Pledging of business assets • Applicants should be asked to pledge premises, machinery and other ass ets used in the business as security for the EFG loan, usually in the form o f a fixed or floating charge. • Where the assets to be pledged include property with any element of residential use (eg. shop with flat above) consideratio n must be given as to whether or not the borrowing will be MCOB regulated. If the borrowing would be M COB regulated, these assets must be pledged to secure conventional facilities only as it is not possible for EFG loans to be MCOB regulated. Guarantee Premium • A guarantee premiu m is payable to the Government to the value of 2% per annum on the reducing balance of the loan. • Premiu ms will be reduced to 1.5% (i.e. a 25% discount) will be applied to premiu ms due and collected in 2009. This will be managed centrally by the Govern ment’s collect ion agents; there is no requirement for the Bank to amend premiu m schedules. • All premiu ms are paid quarterly by Direct Deb it. Premiu ms must be paid fro m a RBS / NatWest account to aid identification o f the loan in the event a payment is missed. • It is essential that the direct debit in respect of the BERR premiu m be paid as it falls due for pay ment.