The Government side-stepped an issue when they decided that Directors Personal Guarantees (PG’s) were not to be asked for by lenders for the ‘Covid’ loans. But this is an issue that has to be addressed and I’m puzzled as to why lenders and the credit agencies are not doing anything about this.
So, what is the problem? Well a number of things:
- When a lender asks for a PG the Director is putting their personal finances at risk, including potentially their home. A recent survey suggested that 20% of Directors don’t tell their spouse that they are signing such a document.
- It used to be a requirement that independent legal advice was needed when a Director signed a PG. It has now become more relaxed with many lenders.
- There is no central register of PG’s given. So, a lender who is relying on the means of a Guarantor could find that other lenders have already lent against that means, and no-one would know.
- It is so common for PG’s to be asked for now, that the Directors of a growth Company could be giving PG’s for bank lending, HP, invoice discounting, even phone contracts. They sometimes forget what they have given a PG for.
- It is unusual for a Director who gave a PG years ago for a loan, to then check that the bank has ‘cancelled’ the PG upon repayment. They remain in the bank’s records and there are cases where they have been relied upon by the bank for subsequent facilities.
- Lenders use ‘Asset and Liability’ statements for loan applicants. Not all include Directors PG’s as a liability (when they are a ‘contingent’ liability) and if they do, Directors may omit them or forget that they have given them – and how does the lender check the accuracy of the information?
- In the event of a Company failure where a Director has given PG’s to several lenders, which takes priority? There seems to be some ambiguity about this.
- The High St banks have more robust processes around this (over the years things get tightened up on the back of Court cases) but many of the new lenders seem quite lax in how they take PG’s. And of course, the escalation of such lenders has increased the requests for PG’s
- Many of these new lenders (including the ‘platform’s’) claim to have exceptionally good algorithms for assessing risk. However, the lending decision then seems to depend on whether the Director is prepared to sign a PG. It can feel like lazy underwriting.
- The impact of the new HMRC preferential status regulations (due to come in on 1st December) is going to leave banks with more of a shortfall when a Company fails – and more likely to call upon a PG for recovery.
I know all the arguments about a PG being asked for to ensure that the Director(s) co-operate and work with the lender if a Company fails. I’ve used them myself countless times. However, where a PG is there to give a lender some comfort that the Director will contribute financially, the system needs to be vastly improved.
My suggestion is:
- One or more of the Credit Reference Agencies should set up and maintain a register of PG’s given and relied upon.
- Lenders should encourage Directors to take out insurance to cover the possible financial impact of a PG being called upon. Such policies exist from specialist insurers. It is surely no different from suggesting that they take out a Life policy to repay a debt in the event of death.
But who will lead on this? Either HM Gov or those that could make some money out of it – Experian, Equifax, the Insurance industry?