Concern for SME owners as CBILS loans worth £1.22bn have a personal guarantee as security
A Freedom of Information request to the British Business Bank has revealed the high personal risk the owners and directors of smaller businesses have taken to secure funds through the Coronavirus Business Interruption Loan Scheme (CBILS). The request by Purbeck Insurance Services, provider of the UK’s only personal guarantee insurance to SME business owners and directors found that as at 31 December 2020, CBILS loans to the value of £1.22bn were advanced with a personal guarantee in place as security for the lender and the average loan backed by a personal guarantee was £766,000.
A personal guarantee lifts the veil of incorporation and puts the borrower’s home and personal assets on the line as security if the business fails and the loan is called in. Under CBILS, for loans of more than £250,000 lenders are permitted to ask for additional security from the borrower in the form of a personal guarantee.
Recovery of loans under the personal guarantee is capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied through insolvency. Of the remaining outstanding amounts, 80% is recovered through the government guarantee and 20% of the loss is absorbed by the lender.
Based on the average loan of £766,000, if the business has minimal assets the owner could need to pay back close to £153,000 to the lender. The introduction of the crown preference on 1 December 2020 will reduce recoveries for lenders with floating charge or unsecured positions, placing the personal guarantee at additional risk.
Todd Davison, MD of Purbeck Insurance Services said: “Purbeck has supported a series of applications for personal guarantee insurance for CBILS loans. Our concern is for the small but significant number of business owners who have secured substantial funds using a personal guarantee as security. We know from a survey we conducted in 2019 that awareness of the risks of personal guarantees is poor with 39% of SME owners unclear how they worked. Additionally, the average size of loan – more than three times the UK average house price – could be a significant issue for Directors this year as the CBILS schemes is withdrawn in March and the facilities start to become repayable with interest rates of up to 15%.
“It is vital that the owners of small businesses calculate their loan repayment costs ahead of the 12 month grace period from paying interest. They also need to look at the ways they can mitigate the risks related to the personal guarantees they have offered to lenders such as through personal guarantee insurance. This will settle up to 80% if the outstanding debt in the business fails, but more than this, a demand mitigation response service offers expert support and advice at the point the debt needs to be settled, acting as a point of liaison for the lender. This takes a huge burden off the shoulders of the business owner.”
Personal guarantee insurance is a relatively new type of insurance that offers protection against the risk of a personal guarantee being called by a lender and will offset any outstanding obligations called in under a personal guarantee following business failure. The level of cover is based on a fixed percentage of the personal guarantee the company director wishes to insure and this is dependent on whether the corresponding finance facility is secured or unsecured. In essence, if the business does fail, up to 80% of the loan will be settled by the insurance rather than the business owner’s home, savings and other personal assets being called on to settle the debt.