An entrepreneur's quest for the Enterprise Finance Guarantee

Those of you who have been following this blog will know that i've been awaiting feedback from Bank 2 on my application for Enterprise Finance Guarantee lending.

After Bank 1's rejection, I was pretty much expecting another 'no'.... which is exactly what i've got!

Two reasons were quoted - firstly that it's still early days in terms of sales (despite the fact we've just got in to a big supermarket) and the second - lack of security. Their response on the EFG aspect is very telling...what they told me is that because the scheme involves many restrictions, they are now not looking to lend any funds under the scheme, although they have done in the past.

I've been advised to come back when I have confirmed orders (fair enough, although I already have email confirmation) and alternative security to offer.

Just had a long conversation with Bank 1, who have declined my EFG loan application for the following reasons...

- I need to match any lending with the same amount of my own funds

- the business is forecast to make a loss in year 1

Oh how frustrating...I put together a realistic cash flow forecast showing the business making a loss in year 1, breaking even in year 2, and making a profit in year 3. But what the bank says is that because the business won't be making a profit straight away, the debt is not serviceable. I guess that's true in the short term - in effect for the next six months repayments will come from the loan funds, but surely in the vast majority of cases no business makes a profit in the first few months of trading. And in our case, the extra expenditure in the next six months is to get stock in place to fulfil orders from a large retailer.

As for the matched funding thing, it's just one more barrier for those with a good strong growing business who have exhausted their own funds.

So, where do we go from here?

It's been a busy couple of months here at Bubble HQ...we've just launched our brand new Fairtrade and natural liquid soap range - a world first - and we're right in the middle of Fairtrade Fortnight!

Having successfully 'bootstrapped' these last few months, rather helped by winning two business awards with cash prizes and some support from our bank, we're now on a serious funding mission....

Why?

We had some great news last week...verbal confirmation that one of the supermarkets wants to launch our products later this year! This should have been a moment of huge celebration - and it was for about half an hour - until I started to think about the practicalities. Hmmm. A 12 week lead time AND proforma terms for some of our materials + long payment terms expected by supermarket = CASHFLOW NIGHTMARE!

So...time to get the business plan updated, and resume our quest for EFG funding. Here's our progress so far...

Bank 1 - on the positive, they're very willing to consider it. But here's the catch....

Bank - what security can you offer?

Me - ummm - none sadly - which is why i'd like to apply under the EFG scheme

-- Sue Acton Founder / Director Bubble & Balm

Yikes i'm about to sound like a banker now....which of course I was in previous life!!!!

My understanding is that it's true that the EFG is intented to be 'security of last resort', which means that it can only be used when there is no other security available. If the entrepreneur has assets such as savings, equity in their personal property, share portfolio etc, this must always be used as security first. Certainly in all my dealings with banks over the years one of the first questions is 'is there any equity in your home'?

How the EFG is meant to work I think goes something like this...

1.  Business requires loan (start-up, expansion, asset purchase, working capital etc)

2.  Business puts forward application to bank via business plan (market research, cashflow projections etc)

3.  Bank looks at plan and asks themselves whether they believe this is a good proposition. If the bank decides 'no' then its game over!

Some interesting developments this week...

At The Pitch final on Monday, Mark Prisk, Shadow Minister for Business & Enterprise, talked about business funding and how his government would improve things. The main focus seemed to be on simplifiying existing schemes so that businesses know what's available and what they're eligible for. Can't argue with that! When it came round to question time, I asked him how he proposed to engage with the banks to ensure the EFG worked properly, and cited my experiences so far. Did I get an answer? Well, yes, but not to the question!!! He repeated the simplification point and said 'banks haven't been taking much risk' (really?!).

I've also been reading the Innocent Smoothies story in their book...they were turned down by all the banks for EFG. Not sure if that's particularly reassuring, but at least i'm in good company!!!

Now for a little update on bank discussions...

Bank 1 - still waiting for a return phone call!!!