The likes of The Body Shop and Waterstone’s used funding through the Small Firms Loan Guarantee (SFLG) scheme to get off the ground. But with banks now so reluctant to lend, some believe it’s time for an overhaul

The idea behind the SFLG is that 75 per cent of the bank’s funding is backed by the government. In theory this makes lending to small businesses more attractive because the risk element is removed from a sizeable chunk of the investment.

Unfortunately, the main issue with the SFLG is actually getting one. For Andy Butcher, founder of travel company Golf Holidays Abroad, the promise of securing the SFLG offered a vital lifeline for his company.

‘My turnover is only slightly down on last year, but sales are up and looking good. The problem is that, because the value of the pound has fallen against the euro, I suddenly found myself £150,000 in debt,’ he says.

Butcher wrote to his local MP, who visited his office, and the area manager of Barclays consequently contacted him to suggest applying for the SFLG.

‘I had every reason to believe I could get it. But when I went in to see my bank manager he tore my plan to pieces. Now my company faces liquidation.

‘The banks have been quite happy to take my £1 million turnover and charge interest on my overdraft, but not happy to support the business in other ways.

‘I started my business seven years ago in my back bedroom and now wish I hadn’t as I’m about to lose everything.’

Justin McFarlin, co-owner of printing company Print Academy, admits he was lucky to secure SFLG financing through venture capital firm Venture Finance.

‘We managed to get £75,000, which was crucial to bolstering our cash flow and meant we could buy a lot of equipment our company needed.

‘Without this help we would have had to walk away from a viable business we knew could become a success.’

McFarlin says the climate is now much harsher for SMEs starting out. ‘I wouldn’t want to be in the situation we were in a year ago trying to raise funds, as I’m not sure we would have been able to.

‘We were some of the last batch of people in a position to get funding before the credit crunch hit.’

Stephen Alambritis, head of public affairs at the Federation of Small Businesses, says that the 75 per cent government backing doesn’t make a difference to the banks’ willingness to lend.

Alambritis says banks have paid very little attention to even promoting the scheme at a local level. ‘I’ve heard cases where some of our members have gone into the banks and asked about the scheme, but the bank manager hasn’t been aware of it,’ he adds.

‘It’s a good scheme, but I think we’ve reached a situation where the banks are just being really mealy mouthed about lending and they are not going to shift.

He adds the government should take measures to divest some of the power from the banks and give it to other bodies, such as regional development agencies and town halls instead.

‘The banks are culpable of the lack of lending to SMEs with their inaction, but the government is also guilty for continuing to believe in a scheme which is not easily accessible.’

If you remain undeterred, here’s a quick guide on how to apply for the SFLG:

•    If you have a turnover of up to £5.6 million, or £3 million for non-manufacturing companies, you are eligible for the loan.

•    The loan, of up to £250,000, has now been extended to all small businesses regardless of trading history.

•    Make sure your business plan is detailed and up to date.

•    To find an approved SFGL lender visit the BERR website.