CBILS and the Personal Guarantee

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Jim Shaw, Founder and Partner at Shaw & Co discusses the implications of banks requiring Personal Guarantees (PGs) to lend under the Coronavirus Business Interruption Loan Scheme (CBILS) and the moral rights and wrongs of business owners putting personal assets on the line to support the economy.

“Will I have to give a personal guarantee to access CBILS support?” This is the most common question that clients have been asking us since the Coronavirus Business Interruption Scheme (CBILS) was announced on 11 March 2020.

We have always feared that personal guarantees will be a feature of this emergency funding and said as much in our open letter to the Chancellor published on 19 March 2020. Since details of the scheme were released by the British Business Bank at the beginning of this week, it quickly became clear that most lenders wouldn’t even consider a CBILS facility without a personal guarantee.

Several lenders have since relented for loans under £250,000 but above this amount personal guarantees still appear to be on the table. We also suspect whilst the lenders are reporting to the press, that they are not taking personal guarantees at this lower level, they will take a short form guarantee which will look very similar to a personal guarantee for many business owners.

The one notable exception is RBS who it has been reported will offer business interruption loans without asking business owners for a personal guarantee. We wait to see if this above £250,000 and unilaterally applied, or just in “certain cases”.

To remain balanced, the British Business Bank has restricted lenders from taking security over Primary Residential Property under the scheme. But all other personal assets a business owner holds appear to be fair game.

In normal times, personal guarantees aren’t about covering expected losses, but they are there to “focus the mind” of the business owner and give the lender comfort that there are personal ramifications for unscrupulous behaviour. As such they are normally limited in quantum and appropriately “sized” given other security offered to the lender.

When business activity is relatively predicable and personal guarantees can be negotiated to be reasonable in quantum and scope, many of our clients have proceeded to enter into such arrangements as a sensible part of an overall funding package.

As such, we are not saying that personal guarantees are flat out inappropriate, far from it, however with the highly uncertain situation we face today, we raise a moral objection when business owners are forced to put personal assets on the line to save their business and access “government support”.

Let’s be clear here, the devastation of the economy has come about through actions of the Government in face of the COVID-19 pandemic. Those actions may be the correct ones, and the only ones in light of the scientific advice, but the second order effects of these actions are huge, and no single business owner has a choice about them. This is a state-controlled situation the likes of which this country has never seen before.

Prime Minister Boris Johnson acknowledged in his daily briefing the “unprecedented state intervention”, and along with his ministers has vowed to “do whatever it takes” to support business and the economy. Unfortunately, the Coronavirus Business Interruption Loan Scheme falls short of this standard in many ways, not all of which are covered here.

Most notable of these failings from the business owners’ point of view is the insistence on personal guarantees that result in a doubling down of risk and an ultimate underwrite of much of the financial devastation being inflicted on SMEs.

It is easy in these situations to blame unreasonable lenders; however, our view is that the issues start further upstream. The Government must accept that the national balance sheet needs to be used to underpin the economy, wholly and unreservedly. Guarantees need to cover 95%-100% of the loan and personal guarantees prohibited or very limited. In our view, the CBILS arrangements currently seek to push too much of the risk on to the lender and then on to the business owner.

As the CBILS machine is now in full flight, we expect any changes in policy from here will involve tweaks rather than wholesale changes and we expect that personal guarantees will form part of most, if not all loans over £250,000 despite any moral objections.

Seeing this from the point of view of the Government and the lender you can understand that some “skin in the game” from the business owner is always going to seem fair to them as a protection against the dishonest few.

The key is going to be negotiating the appropriate limits to guarantees, restrictions to specific bank exposures, joint and several liabilities and other deeds of contribution between those directors and shareholders entering them. Not to mention making sure that you are drawing down enough funding to make sure that it’s unlikely you will run out of cash.

We are working with lenders, the British Business Bank and the Government (where we can get access) to improve the CBILS programme. We don’t think that it is going away, we think CBILS is going to be the only game in town for SMEs looking for Government supported cash to prop up their businesses, but we can clearly see that certain changes need to be made before money can really start to flow.

If you want help with your CBILS application and negotiating the right levels of borrowing, terms and security package, do get in touch. Our team are here to help.

 

Important Notice – Since the date of publication of this article, numerous changes have been made to the CBILS scheme and other Government support packages. This article should be read in the context of the date of publication stated at the top of the page. For further COVID-19 financial support updates for business, subscribe to our mailing list. 

 

Jim Shaw – Founder & Partner, Shaw & Co

Jim founded Shaw & Co around his kitchen table in 2011. Since then his business has formed one of the largest specialist advisory teams in the South West. Jim has a deep expertise in mergers and acquisitions and advises clients across multiple sectors on complex M&A transactions. He has completed more than 70 M&A deals with a combined transaction value exceeding £0.5bn. He is a Fellow of the Institute of Chartered Accountants and has received several awards and industry recognition including South West Young Deal Maker of the Year in 2013 and nomination for South West Deal Maker of the Year in 2018. He is also listed as one the regions’ 42 entrepreneurs under 42 to watch.

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