One in five Enterprise Finance Guarantee loans ends in default

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Figures from Bridging Finance have found that the government lending facility, aimed at those which have previously been rejected by providers of traditional commercial loans because of a lack of security or “proven” track record, is financing firms that go into default 15 per cent more than normal.

EFG is managed by British Business Financial Services, a wholly-owned subsidiary of British Business Bank, but is “on the balance sheet of the Department for Business, Innovation & Skills”, according to a statement. It provides 75 per cent guarantee to lenders.

Bridging Finance is now calling on businesses to review lending exit strategies before securing finance facilities. Going into more detail, Bridging Finance managing director Chris Baguley said: “It seems clear that the EFG model is open to default rates which are approximately 15 per cent higher than expected under commercial lending.

“There is no denying that reduced lending from banks has meant many businesses are turning to alternative forms of finance.”

Baguley cited an ASTL report that concluded the value of loans written in 2014 grew by 62.5 per cent over 2013, and stressed that flexible finance need not end “sourly” as long as an exit strategy is planned form the start.

This would include setting up a repayment strategy from the very start to protect businesses and lenders from defaults and missed payments.

“It’s crucial you are sure of your exit strategy, in other words how you will repay the finance facility once its term comes to an end. As a lender, we won’t provide finance unless a viable exit plan is in place. This gives your business focus,” he added.

“The majority of exit strategies involve either refinance or sale. Short-term funding fills the gap whilst companies secure long term finance from the sale of a property or other business assets. Other typical exit strategies can include the sale of a business or shares, cashing in investments or repayment of invoices due.”

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