Credit, Collections & Insolvency News
Analysis by Purbeck Insurance Services shows that owners of SMEs have more than £1.2 billion of personal liabilities linked to emergency pandemic support loans, with 1,587 directors agreeing to such terms when taking on credit through the Coronavirus Business Interruption Loan Scheme (CBILS).
The report, which comes after a Freedom of Information request from the British Business Bank, shows that the average size of a business interruption loan backed by a personal guarantee is £766,000.
A Personal Guarantee lifts the veil of incorporation and puts the borrower’s home and personal assets on the line as security if the business fails and the loan is called in. Under CBILS, for loans of more than £250,000 lenders are permitted to ask for additional security from the borrower in the form of a personal guarantee.
Recovery of loans under the personal guarantee is capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied through insolvency. Of the remaining outstanding amounts, 80% is recovered through the Government guarantee and 20% of the loss is absorbed by the lender.
Based on the average loan of £766,000, if the business has minimal assets the owner could need to pay back close to £153,000 to the lender. The introduction of the crown preference on 1 December 2020 will reduce recoveries for lenders with floating charge or unsecured positions, placing the personal guarantee at additional risk.
Todd Davison, MD of Purbeck Personal Guarantee Insurance said “Purbeck has supported a series of applications for Personal Guarantee Insurance for CBILS loans. Our concern is for the small but significant number of business owners who have secured substantial funds using a Personal Guarantee as security. We know from a survey we conducted in 2019 that awareness of the risks of Personal Guarantees is poor with 39% of SME owners unclear how they worked. Additionally, the average size of loan – more than three times the UK average house price – could be a significant issue for Directors this year as the CBILS schemes is withdrawn in March and the facilities start to become repayable with interest rates of up to 15%.”
“It is vital that the owners of small businesses calculate their loan repayment costs ahead of the 12 month grace period from paying interest. They also need to look at the ways they can mitigate the risks related to the Personal Guarantees they have offered to lenders such as through Personal Guarantee Insurance. This will settle up to 80% if the outstanding debt in the business fails, but more than this, a demand mitigation response service offers expert support and advice at the point the debt needs to be settled, acting as a point of liaison for the lender. This takes a huge burden off the shoulders of the business owner.”
Douglas Grant, Director of Conister, part of Manx Financial Group, said “We believe the number could be quite a bit higher. The push to move the liability to a Government-backed indemnity represents an improvement in the lender’s credit position however it must be noted that the SME was fully underwritten by the funder for a CBIL in the first place, so should theoretically be responsible. If the position is designed to take the Director out of their liability then that’s a win win for everyone except the Government. There is only so much that can be done by the Government and we must avoid amplifying the zombie status of many of UK SMEs, living off an ever-increasing debt pile, at all costs. ”
“The long-term future of the UK’s business sector is fundamentally reliant on people and resilience. Business has always been about people buying from other people. We must ensure that principally the financial security of individuals is protected so that they can continue to conduct business with each other and while businesses across the country have shown extraordinary levels of adaptability and strength in the face of changing consumer behaviour, we must also appreciate that we are now beyond the survival stage.”
