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ANNEX E FUND PROFILE - WEST OF SCOTLAND LOAN FUND

Objectives of fund

The West of Scotland Loan Fund is a 'gap funder' providing loan finance to small and medium sized enterprises in the West of Scotland. It is backed by the 12 local authorities in the West of Scotland. The fund aims to ensure that good, commercially viable propositions do not fail from a lack of access to finance.

Loans up to £50,000 are available to existing businesses trading for more than 2 years, while loans up to £30,000 can be arranged for new or existing businesses trading for a shorter period.

The interest rate is 2% above the Royal Bank of Scotland Base Rate, fixed for the period of the loan. The maximum repayment period is 7 years, although 'capital holidays', usually 6 months may be considered. As a generality, loans under £20,000 will require no legal security. However, the right is reserved to take security on loans below £20,000 where it is appropriate to protect the investment.

Security is usually taken in the form of a floating charge over the assets of the business or standard security.

Loans can be used for the purchase of plant and equipment (new or used), for the provision of working capital and the purchase of property. Loans cannot be used for property development or to obtain private cars.

Geographical coverage and eligibility

The Fund covers the local authorities in the former Strathclyde Region, i.e. Argyll & Bute, East Ayrshire, East Dunbartonshire, East Renfrewshire, Glasgow, Inverclyde, North Ayrshire, North Lanarkshire, Renfrewshire, South Ayrshire, South Lanarkshire and West Dunbartonshire. Eligible and ineligible sectors include the following:

Eligible Sectors

• Manufacturing
• Service to Manufacturing
• Construction
• Wholesale
• Transport and Distribution
• Software Development
• Agriculture linked to farm diversification
• Tourism
• Service based (providing they are not one of the ineligible sectors)

Ineligible Sectors

• Retail
• Motor Vehicles
• Real Estate/Property Development
• Professional Services
• Social and Personal Services
• Pubs, Clubs and Restaurants
• Local Services

The above should be used as a guideline only as priorities vary at the local level e.g. South Lanarkshire may have a priority towards businesses in the rural area, whereas South Ayrshire may support tourism based businesses.

Financial resources

The West of Scotland Loan fund has substantial cash resources. An analysis of the published balance sheet as at the end of 2005 and 2004, and management accounts at March 2006, shows the following position:

Table E.1: WSLF - analysis of balance sheets

Source: CSES analysis of WSLF Audited accounts to 31 March '05 and Management accounts to 31 March '06

Table E.2: WSLF - available resources

'Grant income not yet utilised' largely reflects the ERDF award for the current programming period which is released as loans are made. WSLF accounting policy is to release it on the basis of 47p for every £1 loan made.

The balance sheet shows that the fund held net cash of £9.6million at March 2006, net of bank loans. At 31 December 2005 loans were valued at £3.95 million. During the year to December 2005, loans issued amounted to £2.4 million and £1.1 million was repaid, with bad debts of £21,489 as at 31 March 2006.

The financial resources now available to WLSF appear sufficient for it to operate at its current level for the foreseeable future after the current ERDF programming period.

ERDF funding made available to WSLF

WSLF has been allocated £8.5 million ERDF funding in the current programming period. It divides this funding between the various local authority areas as shown below in a table prepared by WSLF. The table shows each authority's share of the first, second and combined ERDF award.

Table E.3: WSLF - authorities' share of ERDF award

Source: WLSF board paper, 6 ^th May 2006

Investments

The investments carried out by WSLF are as follows, analysed by each local authority's spend against target for the Objective 2 and Transition areas respectively.

Table E.4: WSLF - investments in Objective 2 areas

Source: WLSF board paper, 6 ^th May 2006

Table E.5: WSLF - investments in Transition areas

Source: WLSF board paper, 6 ^th May 2006

Table E.6: Number of investments by sector

Source: CSES analysis of WSLF data

Financial results

The published profit and loss account of WSLF and draft Management Accounts to 31 March 2006 show the following position:

Table E.7: WSLF - audited accounts and management accounts (£)

Source: CSES analysis of WSLF Audited accounts to 31 March '05 and Management accounts to 31 March '06

In addition, WSLF receives resources from the local authorities with whom it operates. These are discussed further below.

Economic targets and outcomes

Table E.8: WSLF - Results to date

Source: WSLF

Table E.9: WSLF - Percentage increase in total number of employees

Source: WSLF

Table E.10 Value for money calculations

Source: evaluation of WSLF

Summary of net impacts

The cost of operating the fund, including 'hidden costs' is estimated at between £3.5 million and £4.0m over the six years (or £580,000 to £670,000 annually).

With the jobs created or safeguarded between 450 and 550 this gives a cost per job figure of between £6,400 and £9,000.

Additionality and displacement

There is an additionality test for all investments, to check that they have not been able to acquire finance from other sources. Further information is included in an evaluation of the Fund and will be obtained from our survey of companies.

Estimated additionality of loan funding

The following assumptions for additionality have been taken form the Stratagem evaluation. Similar data is shown by the CSES survey, the results of which are set out below:

Table E.11: Estimated additionality

Source: Based on Stratagem evaluation 2003

Advertising and application procedures

The key promotional activities that are intended to generate the greatest results are in the 2006 Marketing Strategy:

• The website which all 'enquirers' will be encouraged to visit to find out more information on the fund, check the eligibility criteria and then log their details to download the relevant application form.
• PR in the form of regular press releases including case studies / events / newsworthy items to local and national newspapers.
• Advertising features in national and local papers.
• Advertising features in specific business and professional publications.

The main target groups are new start-up businesses and existing businesses (employing less than 250 people).

Sources of referrers are the Business Development Network (e.g. Business Gateways, Local Enterprise Companies) and Professional Advisers (e.g. Banks Private Sector Investors and Professional Advisers i.e. Accountants, Lawyers etc)

A budget of £20,000 (£50,000 - 2005) has been determined for 2006/2007.

Applications are primarily conducted online at http://www.wslf.co.uk. There is a 4 step process via the website: Step 1 asks: "Are you in or moving to the 'West of Scotland' area?"; Step 2 asks: "Are you an SME?"; Step 3 asks: "Which sector do you operate in?" and Step 4 asks: "Are you having problems accessing capital?" Having clicked on the "Apply Now" button the applicant is taken to the "How to Apply" page. The West of Scotland Loan Fund requires a completed application form, business plan, audited accounts where appropriate etc. and at least 2 years financial projections to be submitted to your local council before an application can be considered.

As soon as application form and business plans are received by the local council, an acknowledgement letter is sent out to the applicant. An economic development officer then contacts the applicant to arrange a visit at their premises to discuss their project. The officer also undertakes an appraisal of the business plan and may request further information or clarification on certain aspects.

Once all the information has been gathered a decision is made to recommend the application for approval or rejection. All decisions on loan applications are made at the local level by the respective council. A business plan supported by audited accounts etc., where appropriate, will normally be prepared and submitted to the Economic Development unit of the local authority. There is approximately a four weekly meeting cycle and, depending on when the application is received, a decision can sometimes be made within 5-6 weeks.

Once the application has been approved, a loan offer is issued usually with certain conditions precedent e.g. confirmation of other funding sources, lease agreement etc. and as soon as the conditions are met the cheque is released to the applicant. The application resides on a password protected server to ensure quality control and monitoring. The application cycle from initial application to issuance of the cheque is _ 90 days and 80-95% of applications are approved.

Management and governance

The fund is administered by West of Scotland Loan Fund Limited, a company limited by guarantee.

Management costs

From the Stratagem evaluation, there were three identifiable areas, which are relevant to working out the costs of operating the fund:

• Administration costs, borne by West of Scotland Loan Fund Ltd - over a 6 year period administration costs are expected to be in the region of £200,000 per annum therefore a total of £1.2 million
• Bad debts, also borne by WSLF Ltd - again over the 6 year period the total value of loans which have gone bad are £1.6 million, discounted by 50% to take account of loan and bank interest earned giving a total of £0.8 million
• The hidden costs of promotion, company assessment, arrangement, monitoring, borne to differing degrees by councils and their partners in Business Gateways and Local Enterprise Companies - using a daily rate of £250 per day for 5 advisers gives a total of £1.8 million.

Taking account of all of the above arguments, it is believed a reasonable estimate for the total cost of running the fund over 6 years can be set at £3.8 million, or £630,000 per annum. This includes outside costs and the accounts of WSLF (see above) show administrative expenditure of £242,000 for the year to December 2005 and £47,734 for the period to 31 March 2006.

During the year to 31 ^st December 2005, as noted above, £2.4 million of loans were issued. Accordingly, administrative expenditure is of the order of 10% of new loans on the accounts basis, or 25% taking into account all other costs.

CSES survey

Turnover (£'000)

Increased turnover - average

Percentage increase in total turnover

Percentage increase in total number of employees

What sources of funding were used in your business before applying for funding (please tick all that apply)?

What was the main purposes of seeking funding?

What were your preferred options for funding?

How did you hear of this fund?

Why did you decide to apply for funding from the West of Scotland Loan Fund?

How easy were the procedures for obtaining funding from this fund?

What would have happened if funding from this fund had not been available?

How easy were the procedures for obtaining any other funding required?

What has been the impact of this funding on the operation of your business?

Do you receive business advice as part of the funding

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