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Understanding personal guarantees and coronavirus

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Updated: 18th May 2020

The coronavirus pandemic has caused an unprecedented demand for business loans and funding as organisations race to save their companies from terminal financial decline. High street banks and other business lenders typically require directors to provide personal guarantees before they sanction borrowing, however.

When the economy is booming and business is good, it’s easy to agree to these terms as the drawbacks aren’t necessarily tangible, but the health crisis has led to huge swathes of the economy suddenly ceasing trade and being unable to restart.

The ramifications of a personal guarantee are serious at any time, but under these conditions they’re particularly stark. Essentially, you become personally liable for the full outstanding loan amount, which in the worst scenario could mean personal bankruptcy alongside the failure of your company.

So what exactly is a personal guarantee, and what personal guarantee safeguards have the government put into place to help company directors seeking emergency funding from high street banks and other lenders?

What is a personal guarantee?

A personal guarantee is a secondary obligation to repay a loan if the principal party, which is your company, defaults. Personal guarantees commonly use collateral as a means for the lender to recover their money in the event of default, and in this scenario the collateral is typically property.

Obtaining this type of security against a loan makes it easier for the lender to enforce the guarantee, but the liability for some guarantees can be capped at the drafting stage, which limits the amount the director has to pay back.

Personal guarantees and coronavirus

The coronavirus crisis has forced the government to take action to protect directors seeking emergency business funding. The rules have been changed to reflect the current position we find ourselves in, and may change again due to the fact that this is a fluid situation that we’ve never experienced before.

CBILS loan scheme and personal guarantees

Banks offering the Coronavirus Business Interruption Loan Scheme, which was introduced by the Chancellor to provide emergency funding to businesses affected by coronavirus, have come under criticism for demanding personal guarantees from company directors.

Borrowers must satisfy the banks’ normal lending criteria before being accepted for the scheme, and some banks have demanded personal guarantees that use directors’ assets as security.

According to the British Business Bank, however, personal guarantees will not be requested if borrowing is under £250,000. For borrowing over this amount, “personal guarantees may still be required, at a lender’s discretion.”

In these cases, the British Business Bank states:

  • Recoveries under these are capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied
  • A Principal Private Residence (PPR) cannot be taken as security to support a personal guarantee or as security for a CBILS-backed facility

The government is clearly trying to limit directors’ personal liability, but the fact remains you should seek professional guidance before deciding to sign a personal guarantee, whatever the amount of the loan.

Can you stop a personal guarantee being enforced?

If you’ve already provided a personal guarantee and are concerned about enforcement, you need to seek professional advice straight away. There are various forms of personal guarantee, and you need to know how yours could affect your own finances, but crucially, if it’s enforceable by the lender.

Providing a personal guarantee is not an easy decision to make, particularly in the light of the coronavirus pandemic. It’s crucial, therefore, to seek professional advice before proceeding, to ensure you fully understand your commitment and what it could mean in practical terms.

You may be able to take out personal guarantee insurance, for example, that further limits your liability. Lenders may also be more prepared to negotiate your personal liability during this time, given the effect of coronavirus on our economy as a whole.

Real Business Rescue can provide reliable independent advice on personal guarantees during coronavirus and beyond. Our partner-led team will assess all your funding options and clearly present the best way forward. Please contact one of the team to arrange a free same-day consultation.

Keith Tully

Partner

0800 644 6080

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