Latest figures from Enterprise Finance Guarantee loans have revealed that 20.2 per cent of loans provided through the £2.3 billion credit scheme ended in default…

An EFG is a loan guarantee scheme introduced by the Government to facilitate lending to businesses which have been turned down for a normal commercial loan due to lack of security or a proven track record.

Managing Director Chris Baguley said it was clear the EFG model was open to default rates which were 15 per cent higher than expected under commercial lending.

“There is no denying that reduced lending from banks has meant many businesses are turning to alternative forms of finance,” said Chris.

“The ASTL reported the value of loans written in 2014 increased by 62.5% compared to 2013. This flexible funding doesn’t have to end sourly, what’s important for businesses considering this type of finance is to begin at the end and start with planning an exit strategy.

Chris believes professional advisors need to work with clients to form a repayment strategy from the start.

“This will protect both businesses and lenders from defaults and missed payments. The nature of loans means they often need to be arranged and secured within a short time frame; the majority of businesses focus on accessing the finance needed and don’t think about the long term implications,” added Chris.

“Yet it’s crucial you have planned an exit strategy with clients, in other words, how they will repay the finance facility once its term comes to an end. As a lender, we won’t provide finance unless a viable exit plan is in place. This gives your clients focus.”

Most exit strategies involve either refinancing or sale while others can include selling a business or shares, cashing in investments or repaying invoices due.

“When relying on the sale of a business or property to repay a short term loan it is important to ask clients realistically how long it will take to achieve a sale,” added Chris.

“It is also essential to think about the price they are willing to accept, should they need to reduce this in order to achieve a quicker sale.”

Bridging Finance Limited works with the professional sector to provide flexible finance for its business clients.