There can be little doubt that the COVID-19 pandemic has brought into sharp relief the personal financial implications for directors should their company fail. Despite the term “unprecedented times” already sounding clichéd there is simply no other way to describe the current crisis and it is difficult to predict what is next for the economy as a whole or for individuals and businesses.
The Government’s Coronavirus Business Interruption Loan (CBIL) scheme is just one of the measures that has been brought in to help ease businesses through the situation we are currently in. The scheme initially came in for criticism for the personal guarantees being requested by some lenders – resulting in some changes to the scheme that mitigate that potential requirement.
The loan scheme is intended to support SMEs with access to loans, overdrafts, invoice finance and asset finance of up to £5million and for up to 6 years. The Government will make a Business Interruption Payment to cover the first 12 months of interest payments and any lender’s fees and will also provide lenders with a guarantee of 80% on each loan.
The headline information sounds attractive, but it is important for borrowers to realise that they, the borrower, will always remain 100% liable for the debt. The 80% guarantee is to the lender, not the borrower, and is intended to give lenders confidence to offer finance when they might not otherwise be willing to do so.
As a result of changes made to the scheme on 6 April 2020 lenders cannot ask for personal guarantees of any form for facilities below £250,000.
For facilities above £250,000, personal guarantees may still be required at the lender’s discretion with two important caveats:
- Recoveries under these personal guarantees are capped at a maximum of 20% of the outstanding balance of the CBIL facility after the proceeds of business assets have been applied; and
- A Principal Private Residence (PPR) cannot be taken as security to support a personal guarantee or as security for a CBIL-backed facility.
These changes go some significant way towards helping to protect the personal estates of company directors but could still leave many having to give personal guarantees in order to survive the current crisis.
The CBIL scheme may help business owners by turning a lender “no” into a “yes” but there will be understandable reluctance on the part of company directors to put personal assets at risk by providing personal guarantees. However, there may be support available in the form of Personal Guarantee Insurance which is a type of insurance designed to give directors the confidence to do business whilst preventing loss of personal wealth in the unfortunate event of company insolvency.
Key features of personal guarantee insurance:
- Cover available across a wide range of business loans
- Unlimited access to business support services; specialist advisors on hand to help
- Policy includes cover for personal guarantee negotiation fees
- Quick and easy application process
- Backed by an A-rated leading insurer
- Cover available for:
- Existing or new personal guarantees
- Multiple personal guarantees
- One or more guarantors
- Maximum level of cover of £400,000
- Claims resulting from deliberate, dishonest, fraudulent, or reckless actions are excluded
- The premium is paid by the company and the cost can be offset against corporation tax
Other terms and conditions will apply in addition to those mentioned above. Full details will be set out in the policy wording that would accompany any quote and cover will be subject to approval by the insurers. Due to current circumstances there is a temporary hiatus on new business whilst insurers take stock of their industry sectors but indicative terms can still be obtained should this cover be of interest and the insurer has confirmed that they will consider cover for personal guarantees given in relation to the CBIL scheme.
PIB Insurance Brokers will be happy to provide further information if required and we hope that you have found this information helpful.
Please note that the information above sets out our understanding of the position as at the date of this document.
Update 28 April 2020: On 27 April 2020 the Government announced a coronavirus Bounce Back Loan scheme for small and medium-sized businesses affected by coronavirus. This scheme will launch on 4 May 2020 and will help SMEs borrow between £2,000 and £50,000. The Government will guarantee 100% of the loan and there will not be any fees or interest to pay for the first 12 months. Personal Guarantees will not be required. See https://www.gov.uk/government/news/small-businesses-boosted-by-bounce-back-loans.