-> Freedom of Information request exposes high personal risk to over 2,300 business owners
-> Average size of a Personal Guarantee backed business loan at the end of the Coronavirus Business Interruption Loan Scheme "CBILS" was £774k.
-> In total, £2.1 billion of CBILS loans were supported by Personal Guarantees.
-> SME business owners could be on the line for over £154k if their business fails.
-> Many SMEs will have ‘Topped Out’ on CBILS, preventing access to the Recovery Loan Scheme.
A Freedom of Information request to the British Business Bank[i] has revealed the full scale of personal risk SME business owners took through the Coronavirus Business Interruption Loan Scheme ("CBILS").
The request by Purbeck Personal Guarantee Insurance found that as of 31 March 2021 when the CBILS scheme closed, 1,981 loans to the value of £1.54bn were advanced with a Personal Guarantee in place as security for the lender.
In addition, 356 loans to the value of £579k were advanced with personal property as security. This takes the total value of loans advanced that pose a personal financial risk to the business owner, to £2.1 billion, with the average CBILS loan backed by a Personal Guarantee £774k[ii].
A Personal Guarantee 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 £250k lenders were permitted to ask for additional security from the borrower in the form of a personal guarantee[iii]. Based on the average loan of £774k, if the business has minimal assets the owner could need to pay back close to £155k to the lender.
Todd Davison, MD of Purbeck Personal Guarantee Insurance said: “Knowing the full extent of the personal risk facing thousands of business owners who provided a personal guarantee for CBILS funding, it is crucial lenders and financial advisors make their customers aware of how they can protect themselves from the risks of a loan being called in – whether new or existing.”
In a recent study[iv] by Purbeck Personal Guarantee Insurance, 88% of 1000 SME business owners said Lenders and Financial Advisers have a duty to make businesses aware of Personal Guarantee Insurance. This type of insurance can settle up to 80% of the outstanding debt if the business fails.
Todd Davison continues: “The CBILS approval rate was 42%. It is expected that the approval rate for RLS will be half of this. For many firms, access to further funding through the Recovery Loan scheme will be off limits as they will have capped out on the maximum loan value with CBILS[v] or they may not meet the much more stringent affordability measures. Seeking finance independently is therefore highly likely to hinge on signing a further Personal Guarantee so it is really vital business owners are made aware of the steps they can take to protect their personal assets.
“The additional concern is whether firms will be able to pay the loans back. With interest rates of up to 15%, following the 12 month grace period[vi], we could see thousands of firms struggling to meet the repayments. Maintaining dialogue with the lender and calculating costs so that they can be factored into the business’s outgoings will help businesses identify at the earliest opportunity where they may need additional support as we get to other side of the pandemic.”
[i] FOI Request for breakdown of loans secured over £250,000 where a personal guarantee was required by the lender
[ii] Calculated based on the number of loan facilities – 1981 plus 356 linked to personal properties. £1,534,065,370 in PG backed CBILS, £579,924,349 in Personal Property backed CBILS
[iii] 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.
[iv] Survey commissioned by Purbeck, April 2021, conducted by Cision. 1000 Directors and Owners running businesses employing 250 people and under.
[v] Maximum loan value of 25% of 2019 turnover
[vi] Interest and lender levied fees will be met by the Government for the first 12 months after drawdown of your facility via a Business Interruption Payment (BIP).