July 2021: The final COVID loans data released by the Government this week[i] failed to provide clarity on the total value of loans which required the business owner or director to sign a Personal Guarantee, putting their personal assets at risk if the business fails. Based on a Freedom of Information[ii] request made by our MD, it is estimated that 8% of the value of all the CBILS loans advanced required a personal guarantee. This equates to £2.1bn in loans taken over the past year.
Whilst the CBILS personal guarantees 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[iii]. This is the case for both CBILS and RLS loans.
Todd Davison, our MD, said: “We know that the average personal guarantee backed loan value exceeded £774k[iv] and from our own experience it was certainly not uncommon for CBILS loans to reach £1m. This is leaving a heavy burden on the shoulders of business owners and directors who now need to start paying back what they have borrowed knowing that failure to do so could have huge personal ramifications.
“We are still facing a great deal of uncertainty as restrictions ease from July 19th and infection rates continue to rise. It is important business owners look for ways to protect their assets if they consider taking further personal guarantee backed loans, through Personal Guarantee Insurance for example. This will offer some peace of mind that if their business does sadly fail, insolvency won’t put their personal finances at risk too.”
[ii] FOI Request in April 2021 for breakdown of CBILS loans secured over £250,000 where a personal guarantee was required by the lender, up to 31st March 2021
[iii] £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.
[iv] FOI Request for breakdown of loans secured over £250,000 where a personal guarantee was required by the lender