EFG as security for lending / how it should work

-- 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!

4.  Bank decides it is a good proposition and is willing to make a loan. Since banks always want tangible security for the lending, they then look at what's available - company fixed assets, company or personal property etc.

5.  If there is no security available, the EFG is there to provide 'security of last resort'

There are some very mixed views on whether banks should be taking security against personal assets for business lending, especially when it's equity in the family home. Some would say that if an entrepreneur is serious about their business they will be willing to risk their home, others would say that this discourages a culture of entrepreneurship.

What I find frustrating about the EFG scheme is that the banks like to insert extra stages in what should be a simple process. So between steps 1 and 2 you have the 'we only consider lending after 6 months of trading' type policy, which means early stage businesses don't even get their plans looked at. Between steps 3 and 4 there are a whole load of extra stages added by banks - the 50% matching criteria, the full directors guarantee criteria, and various others. My frustration is less about the banks adding these criteria - their job is to make money with as little risk as possible - but more that between the banks and the government there are a whole load of mixed messages that mean ultimately the EFG does not achieve what its meant to achieve. My own view is that it will never do so unless EFG lending is managed outside of the banking system.