SMB house owners maintain £ 1.2 billion private liabilities associated to Covid-19 loans

Some CBILS loans had personal guarantees which made the directors liable

Figures show that small and medium-sized businesses have £ 1.2 billion of personal liabilities related to Covid-19 emergency loans, according to the Times.

This puts their personal wealth on the line if their business doesn’t weather the pandemic.

Personal guarantees were used earlier in the pandemic and then restricted due to setbacks. However, figures from a Freedom of Information request show that 1,587 directors consented to taking out loans through the Coronavirus Business Interruption Loan Scheme (CBILS).

These personal guarantees hold directors liable if they incur debt on the company. The banks originally looked for them on CBILS loans of all sizes, and taxpayers signed 80 percent of the debt. They have been changed to only request guarantees for 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 problem” for some directors once loan repayments begin in April, said Todd Davison, chief executive officer of Purbeck Insurance Services.

Borrowers’ primary property cannot be considered collateral, but second homes can. The guaranteed loan recovery is limited to 20 percent of the outstanding amount after the proceeds of the business assets have been used through bankruptcy. This means that in the event of the failure of the lending company with minimal assets, a director could have to repay nearly £ 150,000 if they borrowed £ 766,000.

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

Mortgage Compensation Guarantees are insurance policies that protect the lender from loss in the event of a borrower default.

Douglas Grant, Director of Conister, sees it differently: “We believe in numbers [held in personal liabilities] could be quite a bit higher. The urge to shift liability to government-guaranteed compensation represents an improvement in the lender’s credit position. However, it should be noted that the SME was primarily fully subscribed by the lender for a CBIL and should therefore theoretically be responsible.

“If the position is designed to relieve the director of his liability, it is a win-win for everyone but the government. There is only so much government can do and we must avoid improving the zombie status of many UK SMEs living on ever-growing debt at all costs. ”

As of December 13, 2020, loans to disrupt coronavirus business were granted to 82,618 companies for £ 19.6 billion.

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