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Personal Guarantee risk for over 420,000 small business owners

by LLB Reporter
15th Apr 20 12:00 pm

It is estimated that over 420,000 small business owners in the UK are acting as personal guarantors for business loans and could be facing the risk of losing their home due to the impact of Covid-19.

The estimate from Purbeck Insurance Services, the provider of personal guarantee insurance, is regarded as conservative and could be closer to 560,000. Purbeck is calling on the government to consider a further measure to ease the pressure on small businesses by asking lenders to agree to a three month moratorium on existing loans.

1.4m UK small businesses have external funding in place according to the BDRC Finance Monitor. Of these businesses, Purbeck estimates 30% to 40% will be backed by a Personal Guarantees by the business owner/s or directors.

The Coronavirus Business Interruption Loan Scheme has got off to a stuttering beginning with recent assertions that personal guarantees will not be required from business owners applying for funding.  However what is not clear is how lenders will regard applications from businesses where a personal guarantee backed loan is already in place.

Purbeck fears that this could disadvantage small business applicants for loans under the scheme. Added to this, small business owners appear reticent to add another loan to their debt burden.

Todd Davison, MD of Purbeck Insurance Services said, “While just 15% of small business owners with Personal Guarantee Insurance in place are showing signs of severe financial distress, the broader small business community is suffering.

“Reports suggest however, that the number of businesses securing funds through the CBILS is at a low level.  Our customers are fearful of committing to more debt when they have existing loans to honour.

“We are advising them to contact existing lenders and landlords to discuss a payment holiday but a wider initiative to offer small businesses a three month loan moratorium would help ease the financial burden at this crucial time.”

Federation of Small Businesses (FSB) National Chairman Mike Cherry said, “This improvement marks a starting point, but while one in five formal CBILS applications are approved, the major banks claim their approval rates for standard commercial loans are many times higher than that. These loans are state-backed, so approvals should be higher still. There’s still a lot of work to do.

“Many members tell us it’s difficult to get to the formal application stage – banks are still slow to respond to CBILS enquiries. Even if you do get your forms through, the process is very demanding for the uninitiated. We need simplification: banks should look at pre-filling forms based on data they already have on customers, and we shouldn’t have behind the scenes reporting requirements holding up approvals.

“These weekly updates are welcome. However we’re lacking detail about the customer journey from start to finish: how many have enquired? How many have dropped out at the application stage? What happens to those who are rejected? Are banks receptive to those who are not existing customers?

“And we need to see this data bank by bank so small businesses know which providers are embracing the scheme and which are not. The British Business Bank publishes bank by bank data on its Enterprise Finance Guarantee initiative so we know it can be done.

“At more than £185,000, the average value of a CBILS loan is high. We need reassurances that the fast-track process we’ve been promised for certain loans worth under £30,000 is working. This will require system changes at certain institutions – those changes must happen quickly so all accredited lenders are supporting the full spectrum of small firms. More detailed data on micro business applications would be helpful.

“These figures represent an improvement but we need to see much more. If volumes don’t improve then all options should be kept on the table, including an upping of the 80% guarantee. Other European nations like Germany have already opted for the 100% point.

“And the question of support for early stage, loss making start-ups remains a pressing one. The list of businesses that spent their early years in the red only to go on and be great successes is as long as your arm. They must not be abandoned.”

The Chancellor Rishi Sunak has warned that “more tough times” lay ahead for Britons as over 3m people could lose their jobs over the coronavirus pandemic.

According to the Office for Budget Responsibility (OBR), unemployment across the UK could rise from 1.3m to 3.4m.

The fiscal watchdog warned that one in ten of the working population could end up without a job, and Sunak said not every business or household are protected.

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