Banks and MPs have criticized banks for insisting on personal guarantees to make government-backed emergency loans to business owners.
The requirement charges most of the risk that the loan will deteriorate on the business owner, rather than on the banks.
This means that banks can sue the personal property of a business owner if their business breaks down and they cannot afford to pay down the debt.
Their principal residence would be protected, but the bank could sue other assets.
These can include things like personal savings, stocks or vacation homes. And some believe it will prevent business owners from using the emergency loan program, which the government put in place to prevent businesses from sinking during the coronavirus crisis.
Coronavirus business interruption loans (CBIL) are a key component of the government’s program to protect businesses throughout the ongoing closure.
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The British Business Bank, the government agency overseeing the program, has decided not to require lenders to obtain personal guarantees under the loan program. Instead, he told lenders that they had discretion over the security they needed.
According to UK Finance, formerly the British Bankers Association, the program is expected to offer loans of up to £ 5 million, where the government promises to cover 80% of losses if the money is not repaid. But, he notes, “Lenders can demand security for the facility. ”
And it could allow banks to repossess the owner’s personal assets as well as the business’s assets in the event the business goes bankrupt.
Barclays has told clients that they will need to sign personal guarantees to access government funded emergency funding. And HSBC has told the BBC that it will require some form of personal guarantee for loans over £ 100,000.
However, the Royal Bank of Scotland, which also owns NatWest, has confirmed that it will offer business interruption loans without asking business owners for personal guarantees, proving that more generous terms can be offered.
The rest of the banks will now be under pressure from business customers to copy RBS.
Personal guarantees allow banks to lend more because it means they are more likely to get their money back. That means they don’t have to put that much money aside to cover failures, which is one of the biggest costs for a bank.
But the use of personal guarantees transfers risk from the bank and the government to the business owner himself.
If a loan of £ 100,000 was granted to a bankrupt business and the owner had signed a personal guarantee, the bank would first take over the assets of the owner or the business. Only then would the government step in to cover 80% of the remaining losses and the bank would only have to finance everything that would remain afterwards.
Business owners and MPs say it is not fair when the companies themselves only seek loans because of government emergency measures.
The SME Alliance, which represents small and medium-sized businesses and is chaired by business owner Andy Keats, said that while business owners are grateful for the recognition that most businesses will need help with survive the crisis, “once again, it is the banks and not the companies that will receive the funds to help SMEs”.
“Business owners take all the risks”
He said the banks were looking for collateral – goods they could take back if the loan was not repaid – for the full value of the business interruption loans.
“We would appreciate some clarity because, as things stand, the loans offered mean that the banks have no risk, the government has a small risk and businesses and their managers have a 100% risk”, a said Mr. Keats.
The all-party parliamentary group on fair business banking has tweeted: ” [coronavirus business interruption loan schemes]. The Treasury should issue clear guidelines on parameters and not allow security “at the discretion of the lender” to cloud the waters. Unprecedented times require emergency funding. Keep it simple and not [personal guarantees]. ”
Kevin Hollinrake MP, a former business owner who chairs the group, said, “I asked the Chief Secretary to the Treasury [Steve Barclay] in the House of Commons – does the new regime include personal guarantees and he said he believed not. Well, I understand now that it will.
“It should not include [personal guarantees]. If so, very few business owners will want to join. Under normal business circumstances, you cannot expect banks to lend money without some sort of commitment. But these are unprecedented times and unprecedented measures. ”