Banks, Lenders & Investors Cash Flow & Forecasting Finance

SME directors should be careful when lenders ask for personal guarantees

Personal guarantees beware of sharksObtaining business finance from mainstream lenders, such as banks, has been a problem for SMEs for a number of years, despite various Government initiatives and schemes that were supposed to help.
Even if the bank agrees to a loan request it may be at a very high interest rate or under specific conditions, such as a requirement from the company’s directors to provide a personal guarantee.
However, it is not uncommon for alternative lenders to also request a personal guarantee, and there is some evidence that such conditions may be on the rise, depending on the health of the business and the type of finance the SME is asking for.
Certain SMEs, such as start-ups, sole traders or those with inadequate records to demonstrate the viability are understandably seen by finance providers as high risk and therefore unlikely to be able to get funding without a personal guarantee.
But many directors have only a hazy understanding of the obligations they are taking on.
Read the fine print of a proposed personal guarantee
The Daily Telegraph last year published the results of a survey of 510 small businesses which found that 55% did not know what a personal guarantee was and 21% thought “that it meant a business owner would have to pay the money back on time to the best of their ability”.
Put simply, when a director provides a personal guarantee to a third-party creditor it means that they are agreeing to pay instead, if their company defaults on a loan repayment.
However, this means they are putting their personal financial security on the line, especially if the company is heading for difficulties or is insolvent.
While it may seem acceptable when the company is growing and doing well, circumstances can change, so it pays not only to scrutinise the fine details of any agreement but to also to get advice.
A personal guarantee is only enforceable if it is in writing and has been signed by the guarantor.
Make sure you know the difference between a personal guarantee and an indemnity which in practice tend to be very similar, but the latter is sold as nothing to worry about.
Check also whether it is for a specific loan or for an indefinite time beyond the loan when future loans might be taken out, and sometimes by new directors long after you have left the company.
It makes sense to edit the lender’s documentation to add clauses such as limits to the guarantee, both amount and duration.
It also makes sense to clarify if the guarantee covers the principal of the loan or loan plus any recovery fees which can be considerable.
It is recommended that you at least check the following:

  • What exactly constitutes a default that triggers the guarantee?
  • Is the amount of the guarantee capped?
  • What is the limit of liability of the guarantee?
  • What is the time limit of the guarantee?
  • How do I terminate the guarantee?
  • Will notice be served or can they seek payment on demand?
  • How will the personal guarantee be enforced?
  • What are the terms for any remedy period?
  • How you will settle the guarantee if it is demanded?

While there are obvious benefits for a lender to obtain a personal guarantee, most guarantees are given as a means of getting credit or borrowing money. It makes sense that the guarantor both understands the risks and also considers alternatives. Growing companies generally need finance, especially when they are growing but cash flow can be improved by getting paid swiftly by customers and agreeing delayed payment terms with suppliers. It may be that a business should not grow so rapidly that it is constantly short of working capital.
Finally, it is worth remembering that if a personal guarantee is called upon then the consequences can have a significant impact on the guarantor’s personal finances, and in extreme circumstances it can lead to the prospect of bankruptcy and even losing the family home.

Banks, Lenders & Investors Cash Flow & Forecasting Finance General Personal Guarantees Rescue, Restructuring & Recovery Turnaround

Unworkable business loans and personal guarantees

A Government-inspired business loan scheme would only work if operated in the way that it was actually missold by RBS (Royal Bank of Scotland), according to the director general of the British Chambers of Commerce (BCC).
Under the Enterprise Finance Guarantee Scheme RBS wrongly led borrowers to believe that 75% of the loan was guaranteed by the Government and that borrowers were only required to offer personal guarantees for 25%.
In fact, the 75% government guarantee was to the lender (RBS) only and borrowers were liable to offer personal guarantees for the full 100%.
While RBS has admitted misselling the loan scheme the BCC’s John Longworth has argued that the Government version of the scheme was useless.
In fact, he has said, it would actually only have been of use to small business borrowers if it had actually operated with the government guaranteeing 75% protection to lender with the borrower guaranteeing 25% in the way it was missold.
Are you one of the estimated 9,000 businesses that borrowed through RBS via the scheme? Tell us your experience.

Banks, Lenders & Investors Debt Collection & Credit Management General Personal Guarantees Rescue, Restructuring & Recovery

Should Governments try to help businesses or leave us alone?

Governments are an easy target for blame when life is difficult for businesses.
The previous UK incumbents were accused of exacerbating the conditions that led to the 2008 global economic meltdown, while the current regime’s efforts to improve conditions for business have hardly won high praise.
No business can exist in a vacuum and all benefit from so-called “public goods” such as infrastructure and the education system, but recently John Timpson, chief executive of Timpson the family-run shoe chain, was quoted as saying that the best way government can help businesses is to leave them alone.
Certainly various government initiatives, such as stimulating bank lending to SMEs, have been a resounding failure.  For example, the Enterprise Finance Guarantee Scheme only pays out when the banks have exhausted all other forms of security, including directors’ personal guarantees. Not surprisingly the scheme has failed to attract many takers.
Calls for a review of business rates have fallen on deaf ears and tinkering with the planning regulations in a bid to help revive faltering High Streets has so far yielded no noticeable results. The new Help to Buy scheme designed to stimulate house building and revive the construction industry brought forth dire predictions of a potential new housing bubble.
It’s clear that these days few politicians have significant experience of the world outside of Westminster so is John Timpson right?  Tell us what you think.

General HM Revenue & Customs, VAT & PAYE Personal Guarantees Voluntary Arrangements - CVAs

How to protect Personal Guarantees when a company is insolvent

Many insolvent companies are being run to avoid the triggering of personal guarantees given by directors and owners.
Most personal guarantees are provided to secured creditors such as a bank to cover loans or overdrafts that are already protected by a debenture which provides for a fixed and floating charge over the company’s assets. In such cases the personal guarantee is often only triggered by liquidation when the bank is left with a shortfall.
In view of the above I am astonished how many directors plough on, stretching payments to HMRC and extending unsecured creditor liabilities without fundamentally improving their company’s financial situation via a company voluntary arrangement (CVA).
Secured creditors stand outside a CVA and therefore they have no need to call upon a personal guarantee.
I would urge all professional advisers, including accountants, lawyers and consultants to learn about CVAs since they are such a powerful tool for saving companies and in so doing avoiding personal guarantees being triggered.


Don’t Waste Your Money Marketing

When business owners run short of cash they get desperate. They pretend nothing is wrong and often they pick up marketing ideas. These activities would have been helpful at an earlier stage. Applying them indiscriminately without understanding the context of how the concepts work as part of a strategy late in the day is disastrous.