Personal guarantees – be wary

One of the recent hot topics relating to the CBILS and Business Bounce Back Loan Schemes (BBL) was the absence of a personal guarantee for a majority of these loans for limited company borrowing.

It has been a standard requirement for a majority of limited company lending that a personal guarantee from at least one director is in place to support the debt, regardless of the quality of the business and the size of the lending facility.

This ensures that the director(s) of the business cannot walk away from liabilities in the company name without having to find the ability to repay from personal resources.

The absence of guarantees from the whole of the BBL (loans up to £50,000) and for all CBILS facilities up to £250,000 (and for many over this as well) significantly increases the risk to the lender and in this case, the Treasury, who have guaranteed BBL’s in full and CBILS up to 80%.

There are several reasons why this step was taken when the scheme was rolled out (time, ease, underwriting, etc) but, instead of rehashing old content, I would prefer to focus on a survey of over 1000 small business owners by Purbeck Personal Guarantee Insurance which has found that more than 1 in 5 (22%) has not told their life partner that they have signed a personal guarantee.

Personal guarantees in business lending

“We have estimated that over 420,000 small business owners in the UK were acting as personal guarantors for business loans prior to the pandemic. Furthermore, around £2.1bn in CBIL loans were taken by business owners and directors which had personal guarantees attached.”

In a nutshell, this means that these individuals have agreed to personal secure business debts without telling their partners with whom they are likely to hold a significant amount of their assets jointly. This can include property, vehicles or any other assets of value.

While there are ways to mitigate this risk, a majority of this debt will remain exposed and, in all likelihood, with the partner remaining in the dark

So, what does this mean?

While keeping partners unaware of business dealings has always happened, in this age of increased reliance on computer-generated decisions and credit scoring, it is increasingly risky to keep a secret.

If adverse credit information is registered against a director for a business debt at their residential address, then this impacts everyone who lives at this address. It is highly likely that a CCJ registered at an address will preclude anyone living there from obtaining credit, irrespective of whether they were involved in the original debt or not.

It can also have a major impact on the availability of mortgage products, a majority of which are held in joint names.

When looking to re-mortgage as a couple, it may come as a surprise to an applicant to find out that their partner has adverse credit history which may restrict the range of mortgages they can move to or even prevent them re-mortgaging at all! I can imagine a few nasty shocks in the Bank when this happens!

The importance of credit history in today’s environment

I have often written about the importance of credit history in today’s environment. In fact, if I could offer one piece of advice to anyone, whether they run a business or not, it would be to check and protect their personal credit history. With the rise of algorithm-driven lending and digital Banks, it will only become more important to make sure you are as attractive as possible to a potential lender and credit history is a vital part of this.

While it may be surprising to many to read the numbers above, it comes as no surprise to myself or, dare I say, a majority of people in the financial service industry. I am never shocked by the secrets kept by partners in relation to their business activities and risks.

I always suggest that when agreeing to sign a personal guarantee, a client takes legal advice from a trusted and qualified solicitor (not essential with many lenders) and advise anyone who they share joint liabilities with that they are taking on this risk. At least this way, there are no nasty surprises down the line.