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Enterprise Finance Guarantee (EFG) - Small Firms Loan Guarantee Scheme (SFLGS) & Director's Personal Guarantees bank debt claims for EFG & SFLGS Loans.

Updated 18th November 2024

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Banks provided clear procedures for their employees when they 'sold' the business bank customers Enterprise Finance Guarantee Loans (EFG) or Small Firms Loan Guarantee Schemes (SFLGS) and in 'setting up' Director's personal guarantees for company borrowings.

Those procedures were intended to make sure that Directors, small business customers and individuals providing personal guarantees were properly informed - they could then make informed decisions before entering into any banking or lending agreements.

As an organisation IBAS has a very long history of assisting Company Directors, Limited Companies, Businesses and individuals who have provided personal guarantees to banks but who have not received fair treatment from their banks. IBAS has investigated many EFG & SFLGS complaints where banks have claimed a company debt and made demands on a director's personal guarantee for a directors EFG or small firm loan guarantee debt claim.

Our experience has shown that bank employees have not always followed correct procedures to obtain director's bank personal guarantee signatures and have put the customer at risk from not doing so.

IBAS expertise in dealing with banks and specifically banking agreements, directors personal guarantees banking debt claims and limited company business bank debt dispute issues and complaints, means we offer very experienced advice and specialist guidance on the merits of banking complaints and provide additional options to pursue those complaints.

Companies borrowing by way of an EFG are particularly vulnerable to lender inertia and some Lenders are much less reliable than others. IBAS has found that in EFG and SFLG cases, it is the Lenders control over the Company assets which restricts and often completely eliminates any new ideas for funding or indeed any other form of alternative funding.

This remains the case even though the Lender has reached a point where they are no longer prepared to provide any further support to your Company and in some instances deny any ongoing support.

The nature of the EFG and SFLG is that the schemes are designed to provide financial backing with some financial support to those who do not have the necessary assets to borrow against but which have a workable or worthwhile business plan (or project).

The Lender support their understanding of the Business Plan by confirmation of the application, which itself is supported by the DTI in a Guarantee for the Lender.

The Lender’s desire to lend is assessed against the Business Plan and strength of management.

Personal assets and/or personal security are not intended to be a major consideration.

The strength of the Business Plan at the beginning of this process is therefore the most important consideration and the Business Plan itself must be carefully considered by the Lender in detail. Once the Lender has investigated the financial strengths of the Business Plan and the decision to lend has been made that commitment carries with it a considerable duty to provide professional care in the handling of that account.

From that time onwards the Lender by holding a full debenture over the Company will inevitably control the Company assets and indeed Company financial strategy in future or further borrowing requirements.

IBAS have seen cases where Lenders deliberately delay in providing crucial information which prevents a Company making essential financial decisions and any Lender would be aware from previous experience that such a Company would be largely unsuccessful in gaining another lenders support on a SFLGS (or EFG) after that stage.

When an EFG or SFLG fails there may be a small loss to the Lender (as seen in the Graham Review on SFLG's - initially the major loss will be to the DTI (from the Guarantee which the Government through the DTI provided to the Lender).

However, a much greater loss may be felt by those individuals borrowing on an EFG or SFLGS which then fails.

If they are company directors of the failed company and the lender has gained Personal Guarantees for the Limited Company borrowings the company directors will be at personal risk.

The Lender will chase for payment on behalf of the DTI (from the EFG or SFLGS Guarantee itself) regardless of the fact that the Lender will have been paid and regardless of any failings by the bank involved in the bank procedure at the time of sale of the Loan itself.

Where a Director Personal Guarantee has been taken by a Lender for a SFLGS or EFG, which then failed that Personal Guarantee provides the Lender with a further opportunity for a double claim. 

The lender has the discretion, within the terms of any agreements on security, to apply the proceeds from any business assets to reduce the guaranteed business loan or overdraft.

If proceeds are insufficient to cover the guaranteed loan and other debts including overdrafts, then any personal assets or guarantees pledged against non Scheme lending would be used to reduce the other debts.

If the borrower has business assets, such as stock or premises, that have been taken as security against the loan, the lender will use those to reduce the outstanding debt.

This will enable the lender to reduce its claim on the DTI's guarantee for an EFG or SFLGS loan or to reimburse the DTI if the bank's guarantee claim on the DTI has already paid a claim.

Bank debt recovery officers are very well trained on how to control telephone conversations with customers.The legal knowledge within the debt recovery unit provides banks with a distinct legal and psychological advantage when a customer is attempting to 'negotiate' using the telephone.

It is not an ordinary conversation. The customer is immediately placed at a disadvantage and under pressure as the bank's debt recovery officer takes control of the conversation to obtain what they want - which is primarily information to use against you. They are not employed to 'advise' the bank customer - they are employed by the bank specifically to protect the bank and obtain payment from the customer.

The Bank's business customers have little knowledge of the bank's debt recovery strategy or how it operates but Bank debt recovery units are very skilled in defending the bank's position and trained to use their legal position and knowledge to prevent defences from arising at a very early stage in the bank's claim.

That is why the banks seek the customer's asset/income information as a first priority - immediately the bank has that information the customer is under increased pressure for payment regardless of any disputes or complaints which you may have previously raised.

Overview of the Enterprise Finance Guarantee Loan Scheme and SFLGS

I remain concerned about the high rate of failures evidenced from SFLGS over the years and aware that the bank encouragement to enter into such a loan so that they could hit their own targets was part of the problem.

Also, that specific issue of self interest by bankers continued to run on into EFGs sold by the banks since 2009 when the British Business Bank introduced the new scheme.

I was also concerned by the evident lack of input from the BIS when complaints on the SFLGS were made about the running and implementation of the schemes and the BIS reliance on their hands off policy with a total reliance on bankers to implement the schemes.

That allowed only the participating banks to administer and then decide upon the practices used.

That also meant many SFLGS were miss sold.

We now know that bankers are not all truthful and that they can mislead in order to achieve their own benefits/targets/bonuses/promotion/s regardless of the negative effects on the business or business proprietors or directors.

But, The British Business Bank has continued to rely upon banking honesty to implement and administer EFG schemes whilst also providing a larger lending pool.

But, there is a vast difference between the sales end of the banking and lending system and their debt recoveries units.

No matter what the individuals were told or sold or how it was misrepresented or in some cases deliberately miss sold. Everything previously signed is examined in detail by Bank Debt Recovery Units for it's legality and for the bank and lender’s purposes to obtain payment against individual assets.

A popular banking sales patter was that the individual was not liable for anything other than the % which the government did not guarantee and even senior bankers have stated that as being their understanding in public forums.

If a business owner or director is advised by the banker or lender on those terms and sold on those terms up to and at the point of signature, the incorrect statement/s made then impairs the awareness of the individuals singing into that agreement.

A further issue/problem was the delay in funds reaching the business account - sometimes many months after they were urgently required (in one case 5 months elapsed and that was not unusual) which immediately put those businesses under pressure for funds, whilst there was a lack of any visible bank support – which also denied the business 'opportunity' (which was the reason for the request for funding in the first place).

Opportunities, once lost by Bank incompetence may not come again and the business may be denied any future or profit.

The bureaucratic incompetence of the banks in administering the SFLGS and then EFGs in which the banks apparent lack of knowledge of the scheme itself/of the businesses/their market place and their funding have made matters far worse than they might have been.

In my opinion banks have used both schemes for their own benefits first and often against the interests of the businesses, which they were being sponsored to support and promote.

Widening the pool of lenders, whilst providing greater access to finance for smaller business has not removed the danger from Director Personal Guarantees which are now evidently being taken without adequate control at the sales stage.

In my opinion banks and business lenders do not have (and may well never have the same ideology or long term ideals) as smaller businesses.

Government schemes whilst well meaning have been poorly presented and badly undermined by banks and bankers incompetence and by bankers using such schemes for the bank's self interest and profit above all else.

Where we have been involved at an early stage, IBAS has been able to fully investigate a number of EFG miss sale cases and obtain a very good resolution for the customer.

- Eddy Weatherill chief executive IBAS

Small Businesses in the UK are being let down and from 30+ years experience of the banking system IBAS fully endorse Greg Taylor's comments in the article

Why Britain’s SMEs need a proper small business bank

July 2020 Small Business.co.uk

The fundamental issue is that SME's are held hostage by their Bank current account provider who retains all their personal financial information and most if not all of their assets which are held as security.

The Bank of England recognizes that position in their document

The Open Data for SME Finance Report – Bank of England March 2020

The Bank of England further state: Bank lending makes up 85% of outstanding debt for SMEs

When SMEs do seek loans, the majority consider only one bank – usually their current account provider.

And the chances of being rejected are over 50% higher when applying to a new provider.

This helps to explain why the majority of the lending to date has been provided by larger banks

But as experienced in the 2008 financial crisis, this reliance on existing bank relationships and an inability to shop around creates a risk to the supply of credit during a downturn.

“Survey evidence suggests that a large number of SMEs are financially excluded in some form or other. In particular, 25% of SMEs are put off from shopping around for a loan because of the hassle or time taken.

This means 6 out of 10 would-be-borrowers choose to resort to personal funds instead.

Meanwhile, 70% of SMEs state that they would rather grow more slowly than borrow.

These statistics suggest that the SME lending market is failing to meet the needs of some businesses.

And the problem may be even more pronounced at the smallest end of the scale, where young and small firms also face a higher probability of being declined loans, most likely because of thin credit histories.

This problem appears to be getting worse, as an increasingly large number of SMEs are reliant on the value of intangible rather than tangible assets.”

Many small businesses struggle to access the finance they need. Survey evidence suggests that only 36% of SMEs make use of external finance.

More than 50% of SMEs consider only one provider when seeking a loan and 25% of SMEs are put off from shopping around by the hassle or time taken.

This results in six in ten of those who would like to borrow resorting to personal funds instead.

And 70% of SMEs would rather grow more slowly than borrow.

Research has found that firms borrowing from weaker banks struggled to access credit and invest during the crisis.

This is consistent with the fact that in past downturns, the supply of bank credit to SMEs has tended to tighten faster than credit to larger companies.

During the financial crisis, SMEs also faced higher interest rates, shortened maturities and increased requests for collateral relative to larger businesses.

Since 2017, however, all of the net growth in SME lending has come from smaller banks or from alternative sources such as peer-to-peer (P2P) lending.

The Bank of England in March 2020 identified that in the SME Funding: 'The evidence suggests there is a market failure, because of two information asymmetries.'

IBAS Summary

The Bank of England Report shows that the UK SME financial model of the past three decades is broken and needs to be urgently fixed if UK SMEs are to survive beyond the effects of Covid-19.

Also, now the UK has left the EU it presents a very real opportunity for the Government to address the failures of the existing system by amending the remit of the British Business Bank - so that it can better assist SMEs to survive, grow and prosper.

Greg Taylor is worried that: Many SMEs with long-term potential will therefore find themselves locked out of funding.

That also worries IBAS - it should also seriously worry the Government.

Eddy Weatherill ceo IBAS 17.02.21

We can act quickly to advise and protect you if you are facing liquidation, receivership and being threatened by bank business debt claims demands or Director's Personal Guarantee Debt Claims demands from Limited Company debts.

IBAS experience and knowledge is crucial in supporting any business banking customer in dispute with their bank.

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