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Small businesses face CBILS shock as lenders come calling

Written by Todd Davison on Thursday, 08 July 2021. Posted in Funding, Finance

Business owners who became personal guarantors for CBILS loans and are now facing repayment difficulties, could be getting a knock on the door from their lender sooner than they think.

Small businesses face CBILS shock as lenders come calling

Business owners who became personal guarantors for CBILS loans and are now facing repayment difficulties, could be getting a knock on the door from their lender sooner than they think. 

As many small businesses face the financial impact of four more weeks potentially before pandemic restrictions lift, some business owners who took the big decision to become personal guarantors for a loan under the Coronavirus Business Interruption Loan Scheme (CBILS) could be getting an unexpected call from their lender. 

By 21st June 2020, 50,482 loans had been approved under the CBILS to the value of £10.53bn.  By the end of the scheme, £23.28bn had been loaned through 98,344 facilities.  Over 8% of the total money loaned required a personal guarantee by the owner or director of the business and the average personal guarantee backed loan value reached £774,389. 

It would be fair to say that very few business owners who took out a personal guarantee backed loan last year would imagine that the UK would still be under pandemic restrictions in June 2021.  The devil is now proving to be in the detail.

A little known but important fact about CBILS loans is that if a business defaults on a personal guarantee backed loan under the scheme, the lender will seek out what’s due from the owner/guarantor of the loan before they seek any recovery from the Government. Whilst the personal guarantees under CBILS are limited to 20% of outstanding amounts following the proceeds of business assets during insolvency, a business owner taking a £1m loan could be facing a personal loss of £100,000. (See illustration). This is the case for both CBILS and loans under the new Recovery Loan Scheme.

Signing a Personal Guarantee is a significant step for any business owner yet we found 34% of small business owners had to make the difficult choice to become a personal guarantor for a business loan in 2020 – whether independently or through CBILS.  This means that if the business defaults on the loan, the lender is able to seek settlement of the debt from the director’s personal assets. For some, it’s a risk too far - 45% said they had decided against a loan because it required a Personal Guarantee.  However, 64% said they would be more likely to sign a personal guarantee if there was insurance in place to protect against the risk of providing it.

This has heightened the value of Personal Guarantee Insurance which can mitigate the risks of Personal Guarantees for CBILS loans, new loans secured under the Recovery Loan Scheme or those arranged outside of the Government’s support schemes. 

Ultimately those business owners who have signed Personal Guarantees for a CBILS loan should be under no illusion over the risk this poses to their personal assets. While 20% of the outstanding amount is far more palatable than 80%, there could still be a sizeable sum to be found in the early stages of insolvency. 

It is therefore vital small businesses speak to their lender at the earliest opportunity if they anticipate repayment problems, particularly those firms for whom the delay to restrictions lifting will be a bitter financial blow. They can also call on Personal Guarantee Insurance if this was put in place when the loan was agreed.  

Illustration:

  • £1,000,000 CBILS/RLS loan supported by fixed charge and £200,000 personal guarantee.
  • Business defaults owing £800,000 (as some of the loan has been repaid) and enters an insolvency procedure.
  • The insolvency practitioner, via liquidation, recovers assets on behalf of creditors; as the lender has a fixed charge, realises £300,000 against the CBILS/RLS loan leaving £500,000 outstanding.
  • The lender calls on the personal guarantee at £100,000 (i.e. 20% of the outstanding amount) leaving £400,000 as a loss.
  • The lender calls on government guarantee (80% of loss) - £320,000.

About the Author

Todd Davison

Todd Davison

Managing Director, Purbeck Personal Guarantee Insurance

Todd Davison qualified as a Chartered Accountant with the Institute of Chartered Accountants England and Wales (“ICAEW”) in 2013. His training contract was with Deloitte LLP. Todd co-founded Purbeck Insurance in May 2016 to provide an insurance solution for Director guarantors, giving them the confidence to access business finance and pursue their growth objectives. Since launch in June 2017, Purbeck Insurance has supported SME Directors on over £120 million of Personal Guarantees.

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