SME house owners maintain £1.2bn of non-public liabilities linked to Covid-19 loans

Some CBILS loans had personal guarantees, making directors liable

Figures show that small and medium-sized business owners hold £1.2bn of personal liabilities linked to emergency Covid-19 loans, according to The Times.

This puts their personal assets on the line if their company doesn’t make it through the pandemic.

Personal guarantees were used earlier on in the pandemic and then restricted due to backlash. That said, figures from a Freedom of Information request show that 1,587 directors agreed to them when taking out credit through the Coronavirus Business Interruption Loan Scheme (CBILS).

These personal guarantees make directors liable when taking on debt for the company. Banks originally sought them on CBILS loans of all sizes and taxpayers were underwriting 80 per cent of the debt. They were changed so that guarantees are only sought on loans over £250,000.

The average size of a coronavirus business interruption loan backed by a personal guarantee is £766,000. Such liabilities will become a ‘significant issue’ for some directors once loans start to become repayable in April, said Todd Davison, managing director of Purbeck Insurance Services.

Borrowers’ main property can’t be taken as security, but second homes could be. Recovery of the loans under guarantee is capped at 20 per cent of the outstanding balance after the proceeds of business assets have been applied through insolvency. That means that if the borrowing company failed with minimal assets, a director might need to pay back nearly £150,000 if they borrowed £766,000.

Nic Conner, head of research at Rangewell, said that many borrowers would have agreed to the personal guarantee at a time when they thought that normal trading conditions would have resumed by the end of 2020.  “Given this is now patently not the case, the government should consider offering something similar to the mortgage indemnity guarantees but tweaked to protect business owners,” he said.

Mortgage indemnity guarantees are insurance policies that protect the lender against loss in the event of borrower default.

Douglas Grant, director of Conister, has a different take: “We believe the number (held in personal liabilities) could be quite a bit higher. The push to move the liability to a government backed indemnity represents an improvement in the lender’s credit position however it must be noted that the SME was fully underwritten by the funder for a CBIL in the first place, so should theoretically be responsible.

“If the position is designed to take the director out of their liability, then that’s a win-win for everyone except the government. There is only so much that can be done by the government and we must avoid amplifying the zombie status of many of UK SMEs, living off an ever-increasing debt pile, at all costs.” 

As of December 13 2020, £19.6bn of coronavirus business interruption loans had been provided to 82,618 firms.

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