The loan scheme announced by the government to help ease businesses through the current crisis has come in for criticism for the personal guarantees being requested by some lenders.

In an article for KentOnline, John Walsham of accountants and business advisors Kreston Reeves warns of some of the implications of applying for a loan in these challenging times.

Many businesses will be considering an application to their bank for funding under the Government’s Coronavirus Business Interruption Loan Scheme (CBILS).

A major feature of CBILs is that it will be interest free to the borrower for 12 months, with the government promising to underwrite 80% of the loan should a business fail following the Covid-19 pandemic.

If a lender can provide finance on normal commercial terms they will do so, with that loan usually supported by a personal guarantee from the company directors.

But if not, the lender can decide whether a business can be supported by CBILS and seek to use the scheme to alter a negative credit decision.

To be eligible the business must:

• Be UK based, with turnover of no more than £45 million per annum.

• Operate within an eligible industrial sector.

• Have a sound borrowing proposal, but insufficient security to meet a lender’s normal requirements.

• Be able to confirm that they have not received state aid beyond €200,000 equivalent over the current and previous two fiscal years

The government guarantee element of the loan scheme is, however, easily misunderstood.

The assumption the government takes the risk of 80% of the loan directly if a business fails is not strictly the case.

An example of how the guarantee works in a situation where a business with a CBIL gets into difficulties will explain.

A UK business borrows £100,000 from the bank as a six-year loan under the CBIL scheme. A £50,000 personal guarantee is provided by the business owner. Two years later the business fails with £80,000 still owed under this loan.

The bank claims in the insolvency of the business for the outstanding debt of £80,000 and suppose that there is no recovery from the liquidation of the company.

It means £50,000 is then claimed by the bank under the personal guarantee which must be paid in full by the guarantor. This leaves £30,000 outstanding.

Only then will the bank make a claim under the CBIL scheme from the UK government, with £24,000 of the £30,000 remaining debt paid to the bank (80% of the remaining debt is the maximum which might be paid under the scheme).

It is important for business owners to understand the repayment mechanism for the guarantee scheme and the implications of any security or personal guarantees sought by financial institutions when discussing CBILs.

Businesses should take advice before taking on any debt.

John Walsham is a business development consultant at Kreston Reeves and a former corporate banker. He can be reached by email: john.walsham@krestonreeves.com.

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