SFLG changes: The Chilli readers reply

Following the research note published last month regarding changes to SFLG (small firms loan guarantees), TheChilli has been inundated with comments from readers. Here is a sample of the typical responses.

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Disillusioned entrepreneur punished for being too prudent
As an SME that has just been excluded from the scheme by a few days I am less than pleased. I have chased up SFLG but every time simply got a lot of excuses as to why I did not qualify.

I had both too much personal equity to qualify but not sufficient to get a loan in my own right. Essentially if I had thrown money away, bought fast cars and lived in a council house I would have been home and dry. But I was punished for prudently living in an old fashioned style.

This really seems more like flannel and window dressing rather than a practical scheme to promote small companies.

I have been talking to friends who are now out in Vancouver and Perth. There the assistance schemes are practical, positive and actually work.

So I have a choice of forming a new company and sitting on my hands for two years or lifting and shifting to an environment where the support is real rather than an illusion.

Ramsey Martin
Advanced Marine Innovation Technology Subsea Ltd

Not helpful guidance
Further to our recent e-mail correspondence and your recent article, I have been trying to get clarification from the DTI re: the "Five year rule" established under the new eligibility guidelines. I have finally received a response (click here for guidance document).

This guidance note is still not very helpful, so I sought further clarification.

I am advised by the DTI that the five year period begins from the date of the audited accounts that the company first became liable for paying corporation tax. This clearly means that early stage loss making technology based businesses will be eligible for a longer period than the initial DTI guidance suggested - this is good news! However, the crucial issue remains that the business must demonstrate commercial viability - i.e. the ability to generate revenues and free cash flow to service and repay the loan.

Stuart Ager,
Head of Technology Sector Group, The Royal Bank of Scotland Group Plc

Substance over form issue: when is the company ‘born’?
On the changes in small firm loan guarantees, I welcome the removal of the two year rule. New businesses need the SFLG more than established businesses. Entrepreneurs have frequently put everything they have into the R&D stage of the business and have produced their prototype products for sale. Frequently loans covered by the SFLG are applied to the purchase of the first goods being manufactured by a third party and setting up a sales team and systems infrastructure to control the business thereafter. It was therefore impossible to meet the “trading for two years rule” in these circumstances.

first activity, first trading or some other criteria? Many businesses go through a number of phases before they become businesses that can rely on traditional finance products. I have just started working with one business which was set up nearly 15 years ago. For the first 12 years it operated out of the garage of the owner and made modest sales and earned modest profits. The next generation has taken over the business and moved to purpose built premises which they funded themselves out of working capital and personal investment. With the increased capacity, the company is putting all of its effort into increasing profitable sales growth.

However it has insufficient working capital for this. There is a core element to this working capital requirement which almost certainly relates to the amount used for the premises. This core element will only be repaid when the company starts to reach 60 percent or more capacity utilisation. This is expected to be reached in 12-24 months time. The company needs to address this with a long term funding solution. Traditional short term lending with overdrafts or invoice discounting is not appropriate.

With the exception of the “five year rule”, the company meets all the small firms loan guarantee criteria. In fact, I believe these are exactly the circumstances that the SFLG was intended to address. As Stuart Ager suggests, I would consider selling the business to a newly formed company, if this enabled the business to secure the right long term funding. However there are administrative costs and tax implications to this.

I hope that the five year rule is defined with sufficient flexibility to allow banks to consider the “age” of the “current” business without having to be governed by incorporation dates or first revenues. There is a substance over form issue here. The birth is really the point at which the business has decided to move out of the “tick over phase” and become a growth business. This may be marked by new management or a significantly different business plan.

James Nicholson-Smith
Principal, The FD Centre

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