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Personal guarantees and the COVID-19 Business Interruption Loans Scheme (CBILS)

The new COVID-19 Business Interruption Loans (CBIL) scheme can provide facilities of up to £50 million to small businesses who are struggling financially as a result of the COVID-19 pandemic.

It is also available for start-up businesses. The scheme went live on 23 March 2020 and will run until September 2020, allowing applications for term loans, overdrafts, asset finance and invoice finance.

Over 40 lenders have been approved to provide these facilities but initially a number of them came under fire for asking company directors to provide further security by way of personal guarantees (PGs). Whilst the UK government will underwrite 80% of the risk associated with debt, the customer is responsible for the whole debt itself, and in the event of a company default, any PG granted would place that director firmly in the firing line.

Whilst technically under CBILS, banks are not permitted to take security over the primary residences of guarantors, a number of banks were effectively doing so circuitously by demanding personal guarantees (PGs) from applicant directors. The existence of a PG willexposethose directors to losing assets(including, potentially, primary residences via bankruptcy/sequestration processes) and savings if the borrower company defaults on the loan. If a director does not have the personal wealth to repay what is due to the bank once a formal demand for repayment has been made, the PG is very likely to act a gateway to bankruptcy. If a director is made bankrupt, there is a high chance s/he could lose theirhome, especially if there is insufficient equity in it to pay all creditors.

Additional unpleasant consequences of sequestration include the prohibition on a bankrupt from continuing as a director and the restriction on someother professional positions. There is a public register of insolvencies and an entry with a director’s name on this can be catastrophic for credit purposes. Thedecision to grant a PG therefore is not one to be taken lightly. The moral of the story is to avoid personal guarantees where possible. So just how possible is this when applying under CBILS?

The heads of the main clearing banks all immediately expressed their 100% commitment to the scheme as soon as it was announced. However, in the early days there appeared to be some delay in this commitment trickling down to individual bank managers, and some profitable and solvent businesses were refused assistance from the scheme.

Banks came under increasing pressure to comply with the scheme and “turn on the tap”. On 2nd April, in order to maximise the support available, the Chancellor extended the CBILS so that all viable small businesses affected by COVID-19, and not just those unable to secure regular commercial financing, would be eligible. At the same time, the Chancellor announced a prohibition on lenders requesting personal guarantees for loans under £250,000.

In terms of loans above £250,000, it has been left to individual banks to decide how to administer the facilities and impose conditions, but the position here too is also changing. Initially, most banks insisted on personal guarantees for these loans, but this is becoming less common. Lloyds for example had previously insisted on personal guarantees for loans above £250,000, but have now relaxed that requirement as it has become out of step with other lenders. The Lloyds example demonstrates that there is such a thing as “peer pressure” amongst the banks, all of whom are keen, post 2008, to come out of the crisis with their reputation intact. Indeed, having initially adopted a policy of demanding PGs for all CBILS borrowing, RBS has now said that it will not be insisting on personal guarantees from any of its customers seeking any level of CBILS borrowing.

If as a business you have had conditions imposed upon you which seem harsh or out of kilter with other lenders, your bank is absolutely insistent on the conditions, and you feel that this is unfair or not in line with the approach of other banks, let us know. As a firm, we are constantly monitoring what is happening on the ground, and are happy to help you, from an informed perspective, to increase the pressure on your bank to re-think.

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