smallbusiness.co.uk: Helping your business think big

Companies without assets to offer as security for conventional bank funding will be heartened to know that there’s still another means of raising cash without giving away too much equity.

The Government funds 75 per cent of the Small Firms Loan Guarantee Scheme (SFLGS), so it takes some of the risk away from the lender, making banks slightly more bold in their lending decisions than usual. Loan applicants are still very thoroughly checked, of course, and there are limits as to whom can apply.

If you run a UK business that has been charged corporation tax for less than five years, with annual sales of less than £5.6 million, you are eligible. The scheme is provided by 27 participating lenders, including a number of high street banks, which can dole out up to £250,000 for a maximum ten-year term. There are a number of sector restrictions that you can find out about on the Small Business Service website (click here), along with the list of lenders.

Case studies:

Following the initial conception of his company, MyFotoWall.com, Stephen Armitage spent most of his own money and most of the subsequent two years on the development of the technology, the processes and the website. Following the presention of MyFotoWall.com’s technology – whereby digital photos are transferred onto wallpaper – at various exhibitions, Armitage linked up with early adopters Bentley Motors and Ikea to provide some clout. ‘So, we had a product, processes and links with customers,’ he recalls, ‘but we needed funds to escalate the business.’

With accountancy firm Grant Thornton, Armitage approached Barclays for a guaranteed loan, in addition to an equity-release plan with venture capital companies: ‘After taking a range of advice I decided that the Small Firms Loan Guarantee Scheme would be best. It may not be for everyone, but a company in the development stage has not got the assets and has spent all its money. It’s not the last resort – that’s venture capital!’

Barclays eventually provided a loan of £125,000 under the scheme. ‘Barclays made everything very clear. Once they had decided it was okay, it was very straightforward. The DTI was passed the proposal from the bank and five or six days later we could draw down the money.’

Lee Bevan, founder and now managing director of Leapfrog Computers, was further down the line when he found his IT company required further cash. He had traded as a limited company for a couple of years before Bevan decided the company needed a lot more cash. ‘The business model changed and the audiovisual products we were ordering were costing a lot more. Our annual sales at that time were about £900,000 and we didn’t have the financial clout. We were eligible for the loan and the business was very young. I looked at business angels but I thought the business wasn’t quite ready for that. The business is still 100 per cent mine at the moment – so I own the whole jam tart, but in the long run I’m prepared to own just a small slice of a big sponge cake.’

Accountant Ford Cambell assessed Leapfrog and also helped former joiner Bevan develop a business plan. They went to SFLGS lender Venture Finance, who provided a Government-guaranteed loan of £100,000. ‘The loan really helped, and we arranged invoice discounting with them as well. The process was straightforward though fairly long. We had to go through a lot of meetings, but it was definitely worth it.’ It certainly has been, with Bolton-based Leapfrog winning numerous business awards, and contracts with Honda, the NHS and the Prison Service.

Faced with the similar motive of not wanting to give away too much equity, but needing expansion cash to add to that raised from private investors and a regional venture capital fund, Paul Rogerson, the founder of mobile video security business 3rd-I Secure, found many banks were unwilling to approve a loan. ‘But Yorkshire Bank aggressively supported the business and they supplied a guaranteed loan very quickly. The terms are very reasonable and it was rewarding to get the recognition that the company I’m running is a good company.’

The facts:

The SFLGS is a joint venture between the Department of Trade and Industry (DTI) and a number of participating lenders.

It’s a guarantee to the lender covering 75 per cent of the loan amount, for which the borrower pays a two per cent premium on the outstanding balance of the loan, payable to the DTI.

It offers the ability to guarantee loans of up to £250,000 and with terms of up to ten years.

It is available to qualifying UK businesses with an annual turnover of up to £5.6 million that are up to five years old. This is generally determined by the date at which the business came within the charge of corporation tax (for a company) or became liable to pay class 2 National Insurance contributions (for a self-employed individual). In the case of a business transfer, the five-year age limit applies to both the business making the acquisition and the business being acquired.

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