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Small Firms Loan Guarantee its better than selling your kidney

Written by: Richard Cottrell

Article Overview: The need for funding in SME's always seems to come when you're least set up to get it. The DTI have a scheme designed to help organisations who may not have the assets to secure tradition loans. The rules changed significantly in December 2005. Whilst there are more restrictions around who can apply for it, often it’s a question of advice prior to attempting to get access to this funding to ensure your business is shaped to attract this style of finance.

Small Firms Loan Guarantee its better than selling your kidney

It’s rare that a business manages to go from start up to long term prosperity without having to raise funds. It can be at start up, when you’re looking to expand, for a take over or a rescue. Usually the times that additional funds are needed are exactly when they are difficult to secure. It’s when you’re looking for working capital because the cash flow is difficult or you want to fund that one big deal that will secure the future for you, that the traditional routes to funding seem to dry up. You could send your kids up the chimneys, or sell your soul to the devil, by jumping into bed with a Venture Capitalist.

VC’s can get a bad press, if you’re looking for major capital investment expect to offer equity in return. What if you’re looking for a more modest investment to assist your business. There are always Business Angels or Private Equity investors who are looking for great ideas to help along the way, but you’ll still need to give away equity to secure the funding.

The alternatives tend to be sources of debt funding. These, however leave you with all the equity in your company but usually want your personal resources in return. You’ll need to offer the equity in your house or other assets that you’ve managed to accrue. They’ll expect to secure the loan against your holiday home in the Algarve or those gold bars under the bed should the unthinkable happen.

What if you don’t want to run that risk or don’t have the equity to secure funding against?

Her Majesties Governments of all colours don’t always come up with good business solutions. I could pull up a soap box and spend hours pointing out their failings. They did, however, come up with a great idea about 15 years ago to assist organisations who need unsecured funds for a variety of reasons. Aimed initially at the “Start Up” entrepreneurs but rapidly expanded into almost any type of commerce where investment is needed but security is in short supply.

As with most Government schemes, the SFLG comes with a hand book as thick as your thigh. This instructs you on who and how to apply. Most of the main lenders use this book as a door stop. This is because they are as confused as most on the rules and regulations regarding the Scheme and what the funds can be used for.

In a nutshell the scheme is this.

It is a government supported scheme that’s 15 years old and enables unsecured loans up to 250k.
To apply for this type of lending you do need a full business plan and 3 years of cash flow projections.


The Loan

Potential capital repayment holiday for the first 12 months to assist with cash flow.
You only need to draw down the amount you need at any one time allowing you to pay interest only on the amount drawn down.
Single application, once you’ve secured the loan you can top it up provided you continue to hit the qualifying criteria.
You can apply for a loan for every company you are a director of.
Interest rate is slightly above bank averages.

There are limitations on who can apply but often it’s a question of ensuring your business is shaped to qualify.

You’ll need a full business plan which includes a 3 year cash flow forecast linked back to your balance sheet and business plan. You’ll also need to know which lenders look most favourably on your business sector. 90% of applications fail either because the company isn’t shaped to qualify or they’ve approached the wrong lender for the funds. It’s always worth talking to people who know the rules and understand who funds against which project.

The Small Firms Loan Guarantee Scheme isn’t the only access SME’s have to additional funding. It can, like lots of Government Schemes, be daunting to the novice but it’s worth exploring before you sell a kidney.

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