Small and medium-sized businesses have accused banks of using a government lending scheme to reduce their own liabilities, in what campaigners claim is the next mis-selling scandal.
The Enterprise Finance Guarantee scheme enables banks to lend to small businesses that lack the collateral to get a conventional loan. The taxpayer guarantees 75 per cent of bank losses, and the borrowing business pays a 2 per cent premium.
But MPs and campaigners are concerned that the risks are not being fully explained to businesses and that banks may be exploiting EFG loans to liquidate viable companies and seize their assets.
A survey for the Department for Business, Innovation and Skills (BIS) last year found that one in seven borrowers on the scheme believed their bank had not made clear that business owners were liable for the entire value of the loan.
However, more than 80 per cent were satisfied with the loan. BIS said the programme was tightly audited to ensure the compliance of banks.
“EFG does not provide insurance for the borrower. It is a mechanism through which BIS shares risk with the lender to enable the borrower to get a loan that would otherwise have been declined,” it said.
Irene Graham of the British Bankers’ Association said: “The EFG is for additional lending to viable businesses when there is insufficient security. There is transparency and the terms are clear in the paperwork.
“This is a guarantee to the lender not to the company. If something does go wrong the bank has to try to recover money from the business before it can claim on the government guarantee.”
But Lawrence Tomlinson, the government adviser who likened RBS, the biggest lender to SMEs (small and medium enterprises), to a “vampire” sucking profits from small businesses, says he has received dozens of complaints about EFG.
Bully Banks, the campaign group set up by businesses that were mis-sold interest rate swaps, is now taking up the question. “People are raising this as another case of mis-selling,” said Jeremy Roe, chairman of Bully Banks. “It is an issue we are looking at.”
EFG loans are riskier than others, according to BIS statistics. The default rate in the first three years was 28 per cent, against 4 per cent for the average SME loan. The government has paid out £55.6m to banks under the scheme and collected £22.7m in premiums from small businesses.
Jameson Smith, an advisory group, said it was receiving several calls a day from entrepreneurs in financial difficulty.
Mike Smith, a partner, said: “Many of the [EFG] schemes marketed by banks have been oversold because of the complexities [of the scheme]: the upshot is a lot of entrepreneurs will mistakenly believe the EFG protects their personal assets in the event of the business becoming insolvent.”
Mr Smith said: “Typically, what happens is [a business] overdraft is withdrawn often without notice.” He said that banks then put in place short-term finance linked to assets. This “gives the bank a charge over assets and a stranglehold,” he said.
Since it began in 2009, banks have made more than 20,000 loans worth over £2bn under EFG. Business overdraft use has fallen by more than £5bn in the past two years.
RBS said: “Some [business] customers have temporary overdrafts and over time they need to find alternative options to restructure that finance.”
“We have helped over 8,000 SMEs, which would otherwise have struggled to obtain finance through this government scheme. We work with our customers to explain the finance they are applying for and inform them of the terms.”
Guto Bebb, Conservative MP for Aberconwy, who has attacked banks’ treatment of SMEs, said he was concerned about the scheme. A profitable business in his constituency was put into administration after its bank rejected an application for an EFG loan. This worsened its credit rating and its overdraft was cancelled as a result, he said.
One client, a removals business, had a £40,000 EFG loan from Lloyds and says it was told when signing up that the company “could claim the 75 per cent [from the government]” if it was liquidated.
However, when the company did fail, the bank sought the directors’ personal assets through an individual voluntary arrangement.
Lloyds said: “The customer received and signed the loan agreement as well as the declaration stating that they remained liable for the full amount of the loan.” The bank said it had received the highest rating from a government audit of the scheme.
Clive May, whose bricklaying business was put into administration in December, says RBS used his EFG loan to pay off a £220,000 overdraft, worsening his cash flow. RBS said it could not comment without his permission.
Mr May said he believed his company was the borrower, and that as a director his personal guarantees could only be called on for 25 per cent of the loan. He said banks wanted to get rid of overdrafts because they had to hold reserve capital against them.