CBILS guarantors could face repayment debt

Business owners who have become personal guarantors could be liable for 20% of the debt. Here’s how accountants should be helping them.

Business owners who have listed themselves as personal guarantors on loans under the Coronavirus Business Interruption Loan Scheme (CBILS) will find lenders coming to them first for loan repayments if the business defaults on a loan of over £250,000.

This means that despite the 20% limit on loan repayments, businesses owners still face significant losses. According to a recent Freedom of Information request made by Purbeck Personal Guarantee Insurance, the average loan backed by a personal guarantee reached over £750,000. In theory, the business owner as a personal guarantor could therefore be liable for around £150,000.

The CBILS provided businesses with up to £5 million in financial support during the Covid-19 pandemic through various options, including term loans, overdrafts and asset finance.

The scheme operates under a government-backed guarantee for loan repayments, paying 80% of any losses. In addition:

• The Government makes Business Interruption Payments to cover interest plus additional lender charges for the first 12 months.
• For loans of £250,000 and over, a personal guarantee is required.
• Recovery repayments are capped at 20% for the personal guarantor.

How then should accountants be supporting their clients in preparing for the eventuality of business difficulties and having to personally repay 20% of the loan?

Identify best-case and worst-case scenarios to head off potential risks

Todd Davison, chartered accountant and MD, Purbeck Personal Guarantee Insurance

When CBILS was first introduced, there were originally no restrictions on requirements for personal guarantees, but following a backlash, the scheme was changed, and the £250,000 threshold was introduced.

We ran a survey during 2019 where we asked 500 SME directors to identify risks associated with personal guarantees –  only 39% could accurately identify those risks, so there appears to be a huge misconception about what a personal guarantee means and the risks involved.

Yet, it’s no surprise that many business owners became the personal guarantor: to have a finance offer on the table after the difficulties of the past 18 months has been a lifeline for businesses.

However, businesses have not fully recovered from the impact of the pandemic, especially many hospitality and leisure businesses that have only just reopened, so there’s going to be a squeeze, especially with other government support schemes tapering off. So in broad terms, businesses may be unable to face these headwinds and end up in difficulties.

The role of accountants has been and will continue to be absolutely crucial in supporting businesses, ensuring they are in good financial standing, with healthy cash flow management and providing support on business finance applications.

Next steps: Accountants should raise awareness of the risk implications for personal guarantors, research alternative finance options, and prepare forecasts and stress testing. Business owners who are personal guarantors should look at worst-case and best-case scenarios and identify what actions the business can take to head off potential risks.

Verdict: Identify best-case and worst-case scenarios to help prepare for potential risks.

Focus on strategy and performance – and work with the lender

Phil Mills, head of food and drink, Old Mill

As the Government presses ahead with plans to return to normal much uncertainty remains. This is as true for businesses as it is for individuals and many business owners have spent the past twelve months battling to survive rather than making strategic plans.

Those that have focussed on understanding their financial performance and cash flows will have seen this coming. For others, it will be a surprise. Where this is the case, it is invariably better to confront any challenges rather than bury them and hope that they go away.

Next steps: Ensure you fully understand your business’ financial health and work closely with your lender. Things may not be as tough as you believe and, irrespective of that, you can look to the future with more certainty.

Verdict: Focus on financial performance and strategy and work closely with lender to head off any potential issues later on.

Seek expert advice as early as possible

Dave Riley, corporate finance partner, Crowe UK

A number of clients already had existing personal guarantees in place for existing lending, but most high street lenders do not take additional personal guarantees for CBILS, and were not permitted to take the matrimonial home as support. In addition, any personal guarantees are restricted to a maximum of 20% of the shortfall after the assets of the company had been realised.

However, we would not recommend business owners acting as personal guarantors.

In the rare situations where personal guarantees are being called in (possibly as part of the existing pre CBILS exposure) then all efforts should be taken to maximise the realisations from the insolvent estate. If the personal guarantee is then crystallised, the directors will have personal choices to make in terms of how to settle the liability and should work with the lender to agree an affordable repayment plan.

Next steps: We would advise businesses to seek early advice if there were a likelihood of the business facing financial difficulty and possibly failing. Directors need to be aware of their fiduciary duties in such a situation and expert advice is needed to navigate the situation.

Verdict: Seek expert advice early if there’s possibility of financial difficulties and ensure directors are aware of fiduciary duties.

Talk to lender about refinancing if there are unsettled loan amounts

Paul Barnes, chartered accountant and MD, MAP

Many CBILS applications were just below the £250,000 threshold to avoid the personal guarantee issue, as this was a primary risk concern of most applicants. However, when facing the uncertainty of lockdown in those sectors greatest affected, there were business owners who simply took as much as they could get.

This may have been born of necessity, or a more risky view that business would return to previous levels long before the loan matured, or was interest bearing. Personal guarantees are what they say on the tin and should not be given lightly.

Next steps: Businesses who now find themselves in the position of the lender seeking recovery of unsettled loan amounts through owners or directors as the personal guarantor, should talk with the lender to discuss possible solutions. These may include refinancing the loan on different commercial terms to CBILS and could be over a longer-term or potentially asset-based, depending upon your business.

Verdict: Speak to the lender to discuss alternative options such as refinancing on different commercial terms. 

Annie Makoff is a freelance journalist and editor.