Small businesses owners who became personal guarantors for coronavirus business interruption loan scheme (CBILS) loans over £250,000 have been warned that lenders will come to them first, if they default on the loan – not the government.
By 21 June 2020, 50,482 loans worth £10.53bn had been approved under CBILS and by the end of the scheme, £23.28bn had been loaned through 98,344 facilities.
More than eight per cent 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.
Purbeck Personal Guarantee Insurance said it has been contacted by small business owners under the mistaken belief that the 80 per cent government guarantee will step in first, protecting the owner or director from immediate personal financial loss in an insolvency.
However, the personal guarantee insurance provider said that in practice the guarantee would be called in first by the lender before the lender claims on the 80 per cent government guarantee.
Whilst the personal guarantees are limited to 20 per cent of outstanding amounts following the proceeds of business assets (during insolvency), a business owner taking on a £1m loan could be facing a personal loss of £100,000.
This is the case for both loans under CBILS and its successor support programme, the recovery loan scheme (RLS).
Purbeck’s warning comes as many businesses face the financial impact of four more weeks before the last pandemic restrictions are lifted.
“We are speaking to small business owners every day who have taken the significant step of signing a personal guarantee to access funding for their business, some through CBILS,” said Keir Cox, operations director for Purbeck Personal Guarantee Insurance.
“A worrying proportion of those with CBILS or RLS loans are under the mistaken belief that if their business fails, their personal assets will be called on last, not first, which is the reality.
“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 RLS 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 asses.
“While 20 per cent of the outstanding amount is far more palatable than 80 per cent, there could still be a sizeable sum to be found in the early stages of insolvency.
“We urge businesses to speak to their lender at the earliest opportunity if they believe they will face repayment difficulties, particularly those firms for whom the delay to restrictions lifting will be a bitter financial blow.”