CBILS defaults: Guarantors first on lender hitlistby
Business owners who became personal guarantors for CBILS loans are surprised to find they are first on the lender’s list in an insolvency.
Few business owners would have expected the UK to mired in the current economic holding position when they agreed to become a personal guarantor for a Coronavirus Business Interruption Loan Scheme (CBILS) or for finance secured independently.
Accountants now need to make clients aware of all the risks associated with CBILS as they unfold.
A third of businesses accessed government-backed loans or finance agreements during the pandemic. British Business Bank data shows that 8% of the total £23.28bn loaned under CBILS required a personal guarantee by the owner or director of the business. The average personal guarantee backed CBILS loan reached £774,389 by the end of the scheme on 31st March 2021.
Many firms are now in a perilous financial position. Office of National Statistics (ONS) data shows 29% of businesses have three months’ or less of cash reserves available and 16% have a severe or moderate risk of insolvency.
The delayed relaxation of lockdown restrictions increased the pressure on borrowers, so owners and directors acting as personal guarantors for CBILSs loans could soon receive an unexpected demand from their lender if their company hits the buffers.
The small business ally
The first person a business person is likely to call in this situation is their accountant. In a recent survey by Purbeck Personal Guarantee Insurance, SME owners and directors were asked who offered them the most help and support with their finances during the pandemic.
Accountants came top of the list, relied on by 35% of respondents, followed by bank managers (30%).
The devil is in the CBILS detail
If a business defaults on a personal guarantee-backed loan under CBILS, the lender will seek out what’s due from the owner/guarantor of the loan before they seek any recovery from the government.
This condition surprised number of small business clients who acted as personal guarantors for a CBILS loan. They expected more time to find the cash on the assumption that the lender would seek redress from the government first, not last.
Personal loss could amount to £100,000
Personal guarantees under CBILS are limited to 20% of outstanding amounts following the proceeds of business assets during insolvency. If a business owner took a £1m loan, they could face a personal loss of £100,000. This is the case for both CBILS and loans under the new Recovery Loan Scheme (RLS).
- £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.
- Lender loses £80,000.
While 20% of the outstanding amount is better than 80%, there could still be a sizable sum to be found in the early stages of insolvency.
Accountants have been on the front line, supporting their SME clients during this period and will need to ensure their clients who have signed personal guarantees for a CBILS loan are under no illusion over the immediate risk this could pose to their personal assets and where necessary commence dialogue with the lender.
A fact of life
Signing a personal guarantee is becoming a fact of life in the SME community and will be a consideration for any business seeking finance in the next few years. At the same time, the risks of signing a personal guarantee have heightened due to the change in the order in which creditors will be paid in an insolvency.
Business owners and directors need to fully understand the risk to their personal assets but just as importantly, they need to understand how that risk can be mitigated. In the SME survey. 45% of owners decided against a loan because it required a personal guarantee, but 64% said they would be more likely to sign a personal guarantee in the future if there was insurance in place to protect against the risk of providing it.
Given their position as the most trusted adviser, are accountants doing enough to ensure their clients understand all the risks and options available to mitigate them and make personal guarantees more palatable?
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Todd Davison qualified as a Chartered Accountant with the 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...