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04 October 2004

Teresa Graham OBE recommends targeted and modernised support for small firms and greatly reduced bureaucracy in her independent review of the Small Firms Loan Guarantee

Teresa Graham today published her recommendations on the future of the Small Firms Loan Guarantee (SFLG).  Countering predictions that she was to propose scrapping the scheme, Graham set out a range of recommendations designed to maximise the support that the scheme offers to small firms.
These include an expansion of the levels of funding available to individual SMEs; raising the turnover limit for eligible SMEs; focusing the scheme on supporting high growth start up and young firms by introducing an age limit on eligible firms; and a radical reduction in the bureaucracy surrounding SFLG.

Ms Graham said:

“After almost 30 years advising small firms seeking finance, I know how hard, and sometimes how easy, it can be to access funding.  Though the debt market for SMEs has improved a great deal since the start of SFLG 23 years ago, I’ve found that some SMEs – particularly start up and young SMEs with growth ambitions – continue to find a lack of collateral a barrier to accessing debt finance.  That’s why I am recommending that the SFLG continues to operate.
However, SFLG is far from perfect.  Its objectives are not well understood; its availability is patchy; its administrative structure is showing its age; and costs to the taxpayer are rising fast.

I believe small firms need SFLG, but they need an updated and modern intervention.  My report sets out the recommendations that I believe will enable SFLG to become a modern intervention characterised by strategic and targeted usage, a high level of understanding about its performance, and which is monitored through light touch regulation and focused on the achievement of broad policy goals.”

Noting the vital contribution made by the lending institutions and other stakeholders to her Review, Graham continued:

“I am particularly pleased that the lenders – whose commitment and enthusiasm for the scheme are vital to its continued success, have indicated that they support my recommendations.  SFLG is a partnership between Government and the lending institutions: both partners are vital.  I would also like to thank all those individuals and organisations that gave so generously of their time when contributing to the review.”

The Graham Review Team, which benchmarked the UK scheme against international loan guarantee programmes and visited many parts on the UK taking views on the scheme, set out 38 recommendations on the future of SFLG.  The highlights include:

  • Expanding lending limits so that all SMEs can access up to £250,000 (SMEs under two years old are currently only eligible for £100,000)
  • Raising the turnover limit for eligible SMEs from £3m (£5m for manufacturers) to £5.6m for all SMEs.
  • Focusing SFLG on start ups and young businesses, by introducing a maximum age limit of three years full trading
  • Reserving funding to incentivise an increase in overall SFLG usage, particularly wider geographic availability throughout banks’ network of branches.
  • Reserving funding to incentivise new lenders into the scheme.
  • Reserving a segment of SFLG funding for banks that demonstrate a clear focus on high-growth SMEs.
  • Moving away from this case-by-case approach to a light touch, low bureaucracy ‘portfolio’ approach, including the removal of the requirement for the DTI to check any loan application upfront
  • Removing the limit on the maximum amount individuals can receive, thus centering the decision on the quality of the business case, not the previous history of all persons connected with the business
  • The new SFLG should be delivered within the new public company intended to deliver the new Enterprise Capital Funds.

Notes for editors

1. Ms Graham presented her report to Government in September 2004. Electronic copies of the Review’s final report are available on the HM Treasury and Small Business Service websites from today.

2. The SFLG was introduced to help individuals overcome the problems obtaining the finance to start up new small businesses and also help small businesses expand.

3. It guarantees loans from banks and other financial institutions for small firms that have viable business proposals but which have tried and failed to get a conventional loan because of lack of security.

4. Loans are available for periods of between two and ten years on sums from £5,000 to £100,000 (£250,000 if the business has been trading for more than two years).  The SFLG guarantees 75 per cent of the loan.  In return for the guarantee, the borrower pays the DTI a premium of 2 per cent a year on the outstanding amount of the loan.  The commercial aspects of the loan are matters between the borrower and the lender.

5. Since the scheme’s launch in 1981, over 88,000 loans have been guaranteed, worth approximately £3.5 billion in total.  Changes to the eligibility criteria made in April 2003 have led to an increase in the use of the scheme of more than 50 per cent.   More than 6,000 loans have been guaranteed since April 2003 with a value in excess of £400 million, and the average loan size has now risen to around £69,000.

6. As announced in Bridging the Finance Gap (HM Treasury and Small Business Service, December 2003), Teresa Graham was asked to work closely with the main SFLG lenders to examine, and if appropriate make recommendations regarding:

  • the structure and rules of the SFLG and their appropriateness to the scheme’s effective operation; and
  • whether the SFLG is proving effective in tackling the financial barriers faced by start-ups and small businesses in the current market.

7. Spending Review 2004 committed DTI to establishing by 2007/08 a new public company to deliver all of its SME equity-market interventions, including the new Enterprise Capital Funds.  The new company will professionalise the management of government's financial market interventions for SMEs, particularly in light of the forthcoming programme of Enterprise Capital Funds, which will require expert management.

8. In order to support an increase in strategic oversight and a much enhanced level of active direction of SFLG, the government recognises that it needs to change the way it delivers SFLG and to develop the right skills and incentive structures to engage with lenders at this new, more strategic level.  The Government agrees that the new company organisation proposed to oversee the Enterprise Capital Funds, which will operate at arm’s length from government, should be responsible for the delivery of SFLG as soon as it is established, thus aligning the Government’s debt and equity investment instruments inside one commercially orientated organisation.

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