What directors need to understand

We’ve covered the bounce back loan scheme that was launched last year to help businesses survive through the Covid-19 pandemic and lockdown in several previous articles.

We’ve also looked at the issues facing companies who took out bounce back loans and will struggle to make repayments because they’ve been unable to open or trade has been terminally reduced. 

In this blog we’re going to look a little closer at the companion lending program for larger businesses and the peril that some borrowers might find themselves in due to personal guarantees attached to these loans. 

The Coronavirus Business Interruption Loan Scheme (CBILS) was designed to provide financial support to small and medium sized UK businesses that were losing revenue and having their cash flow disrupted due to Covid-19. 

The scheme was administered by the British Business Bank and delivered through a range of their accredited lenders and partners providing up to £5 million of finance through loans, overdrafts, invoice or asset finance.

How many CBILS and bounce back loans have been taken out where I live? Click here to find out

Like the bounce back loan scheme, the loans had a government backed guarantee to encourage more lending as the borrower would always remain fully liable for the debt although unlike bounce back loans, the limit was 80% of the total amount lent. 

Another important difference from the bounce back loan scheme is that some lenders were seeking and  accepting personal guarantees from directors in order for their business to be able to access funds.  

This is significant because a personal guarantee explicitly ties the personal finances of whichever director agrees to offer the guarantee to the agreement. 

This means that if the company is unable to repay the debt for whatever reason, the lenders can seek personal redress from that director instead of the company. 

There are some caveats to this. For instance a lender isn’t allowed to take a personal guarantee on any CBILS loan borrowing totalling £250,000 or less. For amounts above that figure, the lender can take personal guarantees but:

  • Debt recovery is to be capped at a maximum of 20% of the outstanding balance of the loan after the proceeds of business assets have been applied
  • A principal private residence (PPR) could not be taken as security to support a personal guarantee or as security for a CBILS-backed facility

A recent Freedom of Information request has revealed that nearly 2,000 business owners and directors have exposed themselves to high personal risk by attaching a personal guarantee to their CBILS scheme borrowing. 

The British Business Bank confirmed that 1,981 CBILS loans were granted with a personal guarantee attached as security. 

The total amount lent for these agreements adds up to £1.54 billion or an average of £774,389 per loan. 

An additional 356 loans were also made to the value of £579,000 each which raises the total amount lent out to over £2 billion. 

Based on the original guidance outlined above, in the case of a loan of £774,389, if the business has minimal assets then the director who made the personal guarantee would be personally liable to repay £154,877.

“Potentially a huge problem for directors”

Chris Horner, Insolvency Director with BusinessRescueExpert, said: “Personal guarantees are a potentially huge problem for directors with a CBILS loan. 

“Unlike the fixed interest rate of 2.5% attached to the bounce back loan, the interest rate of a CBILS loan is set by the lender, although this only applies after the first 12 months which are interest free. 

“After that, interest rates on repayments could be as high as 15%, which could immediately place these businesses and individuals in financial jeopardy as they struggle to make their initial repayments. 

“Any business owner or director who is in this situation should get some specialist advice immediately because there could be terminal consequences for their company and that wouldn’t be the end of the matter for them either.”

A business that took out a bounce back loan and subsequently failed can still close down and be liquidated – and for the vast majority of the directors, this will draw a line under any issues leaving them free to move onto the next phase of their career. 

With the stay on winding up petitions and creditor recovery actions due to be lifted at the end of June, company directors with an outstanding CBILS loan with a personal guarantee attached could be at the beginning of a long, worrying and expensive period of their lives. 

We offer a free initial consultation for any business owner or director that has concerns about their company’s future. 

Once we get the full picture of your situation, we’ll work with you to put together a rescue scenario or let you know about other measures you can take that will give you more time and choices.

Time is running out – so get in touch today.