COVID-19: Personal Guarantees for Business Interruption Loans
Last week, the government made changes to the way in which its Coronavirus Business Interruption Loan Scheme (CBILS) will be administered for smaller businesses. In particular, loans of less than £250,000 will no longer need to be backed by a personal guarantee. However, it’s likely that personal guarantees will still be required for larger loans and, as with any commercial borrowing, company directors need to know exactly what they’re signing up to.
It’s fair to say that Chancellor Rishi Sunak’s rise to power has been quicker than most. Many of us first became aware of him when he was standing in for the Prime Minister in the televised debates before the 2019 general election.
Now, with Foreign Secretary Dominic Raab standing in while Boris Johnson is in intensive care, and Sunak next in line should Raab himself be incapacitated, the Chancellor could soon find himself deputising for the PM in a much more significant way…
In the meantime, since his appointment as Chancellor of the Exchequer just under two months ago, Sunak has overseen unprecedented government support for businesses, including the provision of £330 billion of loans and guarantees. Amongst these is the CBILS, which provides loan facilities to smaller businesses of up to £5 million, without any interest or fees for the first year.
Personal Guarantees for CBILS Loans
The CBILS is administered by the British Business Bank, but the loans themselves will be made by one of 40 accredited lenders. When the scheme was first introduced, some of these lenders were asking company directors to give personal guarantees for the loans. Anecdotally, this put some businesses off using the scheme and, no doubt, extended the uncertainty for employers and employees alike.
In order to provide further support, Sunak announced on 2 April that lenders would be ‘banned’ from requesting personal guarantees for loans under £250,000. As highlighted by ITV’s political editor, Robert Peston, this was fairly disingenuous. According to Peston, the demand for personal guarantees had originally been stipulated by the Treasury itself and the British Business Bank, so pinning the blame on the accredited lenders was a little unfair.
Either way, the removal of the requirement for personal guarantees for loans under £250,000 should be a lifeline for plenty of businesses and will hopefully save many jobs. Of course, for many other businesses, £250,000 will not be enough and, where a CBILS loan of over £250,000 is being taken out, it seems likely that company directors will still need to guarantee the debt and/or provide other security for the loan.
As with almost any personal guarantee, lenders will also insist that guarantors take independent legal advice (ILA). Without this, guarantors may be able to avoid liability by arguing that they weren’t fully aware of what they were getting themselves into. For this reason, banks usually won’t lend unless a qualified solicitor has confirmed they’ve given the ILA to each guarantor separately.
The banks will also usually require the ILA to be given face-to-face. This enables the guarantor to ask questions but also allows the solicitor to make a judgment on whether the guarantor understands the requirements and is signing up to them willingly. It also reduces the risk that a guarantor might be pressurised into signing the guarantee (for example, by a co-guarantor or other third party).
Of course, social distancing rules mean face-to-face ILA meetings simply aren’t possible. However, even before the COVID-19 crisis, many banks were content for the advice to be given using video call services such as Skype or Zoom. That will now have to become the norm, for the foreseeable future at least, and we’re set up to give advice in this way.
If you’d like to arrange a video call in order to get ILA on a personal guarantee, or if you have any other queries about a lender’s requirements for a CBILS loan, please contact Tim Lucas on 020 7288 4753 or by email at TimothyLucas@boltburdon.co.uk.