Banks are at the centre of a storm of criticism over the way they are handling the new government loan system for businesses hit by the coronavirus.
The Coronavirus Business Interruption Loans (CBIL) are being offered by the government to protect businesses as the coronavirus lockdown tightens still further.
But some banks are insisting on personal guarantees from business owners before they will release the money.
This places most of the risk if the loan goes bad on the business owner and not the bank.
So if the firm receiving the loan goes out of business and cannot afford to repay the debt, the bank will be able to go after the personal assets of the owner.
Their main home would be protected, but the bank would be free to go after other assets like personal savings, shares or holiday homes.
The fear is that business owners will find the terms too much to take on and won’t take up what could be a life-saving loan for their business.
It is understood that the British Business Bank – the government body overseeing the loan scheme – has told lenders they have discretion on the amount and type of security they require.
UK Finance, the British banks trade body, said the scheme should offer loans of up to £5 million where the government promises to cover 80% of the losses if the loan can’t be repaid, but noted ‘Landers may require security for the facility’.
Banks use personal guarantees to lend more to business because they are more likely to get their money back if things go wrong.
This means they don’t have to put as much money aside to cover failures which is one of the biggest costs for a bank.
If the owner of a failed business took out a £100,000 loan with a personal guarantee the bank would repossess the assets of the owner and only then would the government step in and pay 80% of whatever remained. The bank would only have to stand the loss of 20% of what it had failed to recover.
The security demand has come under heavy criticism from MPs and business owners who say it is not fair when the firms are only being forced to seek the loans because of the government’s emergency measures.
Kevin Hollinrake MP, chairman of the All-Party Parliamentary Group on Fair Business Banking, said: “The Treasury must issue clear guidance on parameters and not allow security at ‘discretion of the lender’ to muddy the waters. Unprecedented times require emergency funding. Keep it simple, and no personal guarantees.
“I asked the chief secretary to the Treasury Steve Barclay in the House of Commons – does the new scheme include personal guarantees and he said it was his understanding that it would not. Well it’s my understanding now that it will.
“It should not include personal guarantees. If it does, very few business owners are going to want to take it up.
In normal business circumstances, you can’t expect banks to lend money without some sort of commitment. But these are unheralded times and unprecedented measures.”
Andy Keats of the SME Alliance, which represents Britain’s small businesses, commented: “We would appreciate some clarity because, as things stand, the proposed loans mean the banks have no risk, the government has a small risk and businesses and their officers have 100% risk.”