Debt (or Loans)
Types
'Regular' institutional loan - from banks etc. A loan is advanced for a specific purpose and is repayable over a fixed period at a fixed or variable rate. The maximum loan amount will be based on available security (often personal) and the ability to 'service' (pay) interest and capital repayments. It may be possible to negotiate stepped payments and capital repayment holidays. The lender will want to see credible financial forecasts especially cash flow projections. Access may be helped by the Government-backed Small Firms Loan Guarantee - see below.
'Soft' loans - from Government/European sponsored funds - a number of loan funds have been established, financed by a mix of public and private money, to help certain defined industry sectors or UK regions. These loans are usually unsecured, and the terms are often easier than regular loans. Providers include -
• Finance Cornwall - matched amounts up to £50,000 - see Finance Cornwall summary
• Finance South West - see Finance South West
• South West Investment Group (SWIG) - including The Phoenix Fund - see SWIG summary
Mezzanine funds - available from various sources including banks, venture capital firms and specialist mezzanine loan providers. This type of debt sits between equity and regular loans (hence the name). The loan is unsecured, and in return for the increased risk the interest rate will be higher and typically the lender will require the right to buy shares in the company on favourable terms (known as 'equity kicker', warrants, or share options). Mezzanine finance is often used for 'leveraged buy outs', where most of the purchase price of a business is funded by debt, and a small part by equity, so that when the loan is repaid the shareholders are left with 100% ownership at a relatively low cost. See Finance Cornwall summary as an example of a mezzanine fund.
Small Firms Loan Guarantee (NEWS - see below) - Government backed guarantees for 'regular' loans up to £250,000 (if the business has traded for two years, up to £100,000 otherwise) for SMEs*. Payment holidays may be negotiated to help cash flow. The guarantees cover up to 75% of the loan amount and the advantage is that the borrower does not have to provide security. However all available security must have been utilised before any guarantee can be considered. Businesses apply to an approved lender, which includes all the main banks. As with any debt, the lender must be convinced that the loan is serviceable, although the bank may allow some flexibility for an early stage enterprise - but there must be a certain expectation of revenues within a maximum of six months (this latter point is not in the terms and conditions!).
* in this case the definition of SME is up to 200 staff, and maximum turnover of £3 million (£5 million for manufacturers)
NEWS - update on the SFLG scheme -
The DTI has now confirmed that the changes to the SFLG scheme recommended in the Graham Review are to be implemented on 1 December 2005. While most of the changes will improve the scheme, any companies which have traded for more than five years will be excluded. Any such companies must make their applications by 28 October 2005.
The government press release is copied below -
- NEW CRITERIA FOR BUSINESSES TO TAKE EFFECT FROM DECEMBER 2005 -
With sweeping changes to the Small Firms Loan Guarantee (SFLG) to be introduced later this year, businesses are being urged to examine the new eligibility criteria of the scheme.
The changes come after the Government accepted in full the recommendations set out in the Graham Review of the SFLG, which benchmarked the UK scheme against several international loan guarantee programmes and set out 38 recommendations to ensure the continuing relevance of the SFLG.
Competitiveness Minister Barry Gardiner said:
"From 1 December 2005 we will be implementing the recommendations from the Graham Review. This will further enable us to build on the economic stability afforded to us by small and medium-sized enterprises and help them overcome the obstacles they face when raising debt finance.
In its current form, businesses which have been trading for over five years are eligible to apply for a SFLG. In order that qualifying applications from those businesses that will cease to be eligible under the new criteria can be guaranteed before 1 December 2005, it is necessary that fully documented applications be with lenders by close of business on 28 October 2005.
"These changes will encourage use of the SFLG by as wide a range of eligible SMEs as possible and through as diverse a range of lenders."
The new scheme will see a raft of changes that include:
* Expansion of lending limits so a single £250,000 limit applies to all eligible Small and Medium Enterprises (SMEs);
* Raising the turnover limit for all eligible SMEs to £5.6m;
* Reserving resources to incentivise a range of new lenders to join the scheme;
* Reserving resources to enable additional SFLG lending by banks that demonstrate a clear focus on high-growth SMEs; and
* Removing the limit on the level of borrowing that individuals can be associated with (the so called "connected persons" rule), thus centering the lending decision on the quality of the business case, not the previous borrowing history of individuals involved with the business.
Along with implementation of these far reaching changes, the focus of the scheme will move to start-ups and young businesses. This will see the availability of SFLG limited to those SMEs under five years old, as these are the businesses which have had least opportunity to build up a financial track record and assets against which to secure borrowing.
"The Small Firms Loan Guarantee is a vital element for helping businesses achieve ongoing success, making a real difference to those that find it difficult to obtain the necessary finance to grow.