Why a guarantee fund?
Why is it important for small business?
Small enterprises are generally one of the main drivers of economic recovery and account for a large number of jobs for local people. Access to financial sources is important to the operations of firms, especially for newly established ones which don’t have sufficient collateral and reliable financial records to demonstrate that they represent an acceptable credit risk. Without external financing, small businesses would not be able to expand their business or even to survive in today’s highly competitive business environment.
Guarantor service is offered by Mutual Guarantee Societies (MGS) whose main objective is to enable entrepreneurs and small businesses to acces loans for the establishment or expansion of a new or existing business through the submission of guarantee to commercial and saving banks, among other services. This will benefit both the small business and the financial institution. The small business gets the guarantee and the financial institution invests without risk. If the small business fails, MGS will respond as guarantor.
When a small company applies for a loan from a bank presenting a guarantee of MGS, the bank will recognize that MGS will if necessary assume responsibility for the debt with the bank. MGS’s guarantor service is not free of charge; each transaction has a cost to the company that requests it. Companies benefit despite this extra cost because the guarantee increases access to loans under better financial conditions such as lower interest rate and longer period of repayment. The guarantee may not be applied to cover existing bank loans, overdrafts or any other previously arranged financial facility.