While the government’s support measures have undoubtedly helped businesses with their cash flow during the Covid-19 crisis, this rescue action could impact the lending market moving into 2021 and beyond.
HM Treasury figures show that the UK's banking and finance industry has supported over 1.4 million businesses across the country through government-backed Coronavirus lending schemes.
Lenders have approved over 73,000 facilities through the Coronavirus Business Interruption Loan Scheme and over 1.3 million business owners have benefitted from the Bounce Back Loan scheme (BBLS) alone, bringing total lending to around the £40 billion mark.
Chancellor Rishi Sunak has announced that the BBLS repayment structure will be converted into “Pay as You Grow” – offering a more flexible repayment system over a longer period for businesses who borrowed under BBLS.
Pay as You Grow will allow businesses to extend the length of their BBLS loans from six to ten years, cutting monthly repayments in half.
Businesses will also be able to pay interest-only repayments for up to six months and struggling businesses will have the option to apply for BBLS payment holidays, suspending repayments altogether for up to six months.
What will this mean for lending post-Covid?
The ‘Pay as You Grow’ repayment structure has been met with both commendation and caution. While there are obvious benefits in letting a struggling business lighten and defer repayments, it ultimately means some SMEs will be indebted for longer.
The FT has warned that the cheap borrowing has created a new generation of ‘zombie’ companies who could find themselves “limping along in the twilight between the living and the dead”. The government will hope that the 12-month buffer (that borrowing companies are given through the BBLS to commence repayments) will be enough time for businesses to bounce back – but it’s far from a given.
Meanwhile, with lenders ordered to provide more sympathetic repayment terms, this could reduce the amount of funding available to more viable businesses.
At the very least, to reduce their credit risk, lenders might seek enhanced security over some assets of the borrower, namely a Personal Guarantee. This is now more likely following the government’s decision to re-introduce Crown preference for HMRC, which was effective as of 1 December 2020.
The new rules mean HMRC will benefit from a priority preference in any form of insolvency process. This rule change is likely to prompt a shift in mindset among lenders who may now perceive their lending risk to be greater and request a Personal Guarantee from directors to support the lending to their companies.
Signing a Personal Guarantee means that if your business becomes unable to repay a debt to the lender, you’re personally responsible. In other words, if your business plans don’t quite come off and a claim is made under the guarantee, you (and any other guarantors) will be liable to pay the company’s debt, and your personal assets will potentially be on the line.
What are your options for lending in 2021?
It remains to be seen whether this scenario will play out in 2021. But if your business needs to access additional funds from a lender, they may very well ask you to sign a Personal Guarantee.
Many business directors will be worried about the prospect of putting their personal assets at risk given the uncertainty of the environment. However, Personal Guarantee Insurance provides business directors with cover if, following insolvency of their business, the lender calls on their Personal Guarantee.
It can be tailored to each individual, so you can state the amount you want to insure, and you can choose how many directors you’d like to be noted on the policy.
Purchasing this insurance policy will help to reduce the risk to your personal estate, leaving you to get on with running your business. Purbeck covers up to 80% of your risk, so you’re personally protected as you plan the future growth of your business.
Purbeck Insurance is a specialist Personal Guarantee Insurance underwriter, authorised and regulated by the Financial Conduct Authority. We work alongside lenders and brokers to provide a bespoke insurance solution based on the lender’s individual requirements and risk profile. Please contact one of our specialists today to learn more on 0208 004 7250.