Small Firms Loan Guarantee (SFLG)
The Small Firms Loan Guarantee (SFLG) was a governmental initiative in the United Kingdom aimed at facilitating access to finance for small businesses that lacked adequate collateral to obtain loans from conventional lenders. The scheme was operational until it was replaced by the Enterprise Finance Guarantee (EFG) in 2009.
Definition in Detail
The SFLG was established to enable small businesses to access external financing by providing lenders with a level of protection in circumstances where the borrower defaulted. Under the scheme, the government would guarantee a portion of the loan, reducing the risk for lenders and encouraging them to offer loans to businesses that might otherwise be deemed too risky.
Features of the SFLG Scheme:
- Eligibility: Small businesses with viable business plans that could not secure funding due to lack of collateral.
- Guarantee: The government would typically guarantee up to 75% of the loan.
- Loan Amounts: Loan sizes varied, often ranging from £5,000 to £250,000.
- Interest Rates: The rate was determined by the lender but included a premium for the guarantee cost, usually around 2%.
- Term: Loans under the SFLG were typically offered for periods of up to 10 years.
Examples
- Startup Technology Company: A tech startup aims to develop an innovative app but lacks the collateral required to secure a £50,000 loan from a bank. Under the SFLG scheme, the government guarantees 75% of the loan, thus the bank decides to extend the credit.
- Café Expansion: A small café looks to open a new location and requires a £100,000 loan. Despite solid business projections, the café lacks sufficient collateral. The SFLG scheme facilitates the acquisition of the needed funds through a government-backed loan guarantee.
Frequently Asked Questions (FAQs)
What was the purpose of the SFLG scheme?
The primary purpose of the SFLG was to enable small businesses to access financing by reducing the risk for lenders via a government-backed guarantee, thereby supporting business growth and economic development.
Who was eligible for the SFLG?
Small UK-based businesses that were unable to secure a conventional loan due to insufficient collateral but had a viable business plan were eligible for SFLG-backed loans.
What is the main difference between the SFLG and its successor, the EFG?
While both schemes serve similar purposes, the EFG has updated eligibility criteria and operational guidelines, reflecting changes in the market and addressing some limitations observed in the SFLG.
What happened to the SFLG?
The SFLG scheme was replaced by the Enterprise Finance Guarantee (EFG) in 2009, which continues to support small business financing needs with updated provisions.
How did the SFLG scheme benefit lenders?
By providing a government guarantee on a portion of the loan, the SFLG reduced the risk for lenders, encouraging them to lend to small businesses that would otherwise not meet collateral requirements.
Related Terms
Enterprise Finance Guarantee (EFG): A UK government loan guarantee scheme that replaced the SFLG, providing lenders with a government guarantee on most of the loan, thus enabling small businesses without sufficient collateral to obtain financing.
Collateral: Assets that a borrower offers to a lender to secure a loan, which the lender can seize if the borrower defaults on the loan.
Credit Risk: The risk of loss to a lender from the borrower’s failure to repay a loan. Government-backed schemes like SFLG aim to mitigate this risk.
Startup Financing: Funds provided to new businesses (startups) to cover initial operating expenses and support early-stage growth.
Online Resources
Suggested Books for Further Studies
- “Finance for Small and Entrepreneurial Business” by Richard Roberts
- “Financial Management for Small Businesses: Financial Statements in Business” by Steven M. Bragg
- “Entrepreneurial Finance, Third Edition: Finance and Business Strategies for the Serious Entrepreneur” by Steven Rogers and Dr. Roza Makanon
Accounting Basics: Small Firms Loan Guarantee (SFLG) Fundamentals Quiz
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