The impressive growth of platform lenders to SME’s has certainly filled a gap left by the high street banks for lending of a certain kind. But it has also been driven partly by ‘convenience’ – getting a decision almost instantly and then having access to funds within days has appealed to borrowers. However, these deals almost always come with a price: the lender will only lend to a Company if the Directors/Shareholders provide a personal guarantee (PG).
A PG commits the individual to an agreement that ‘if the company cannot pay, then I will’. It is often a condition of the loan not for the monetary value behind it but as it instils in a company director the co-operation that a lender will need to recover its loan from the company’s assets. In short it is there to stop the Directors from ‘walking away’ in the event of a company failing.
There are some issues here, and it’s not difficult to see another financial scandal. Let’s consider:
- It used to be the case that lenders insisted on Directors seeking legal advice when signing a PG. In this way they prevented the obvious problem arising (when the PG was called upon) from the guarantor claiming, ‘I didn’t really know what I was signing’. Lenders are not all now insisting on that.
- This is a real commitment being made and often without consideration of how the guarantor would fulfil this if the worst happened. An interesting survey recently showed that only two out of ten Directors who have given PG’s have told their partners about it. Yet a claim could well severely threaten the family finances (in extreme cases the family home could be lost).
- There is no central register of PG’s. I could present myself as having a net worth of £X without declaring that I have given PG’s way beyond my ability to meet them. Surely it would be possible for the credit reference agencies to collect this information from lenders (and ideally the performance of the underlying debt?).
- Lenders ‘ALIE’s’ (Asset & Liabilities/Income & Expenditure) documents – which are often a key part of their appraisal of a lending proposition – often don’t include PG commitments. This is presumably because they are ‘contingent’ by nature, but surely a glaring exclusion?
- Even if they did, Directors of growth businesses have probably had to give PG’s for numerous financial products, such as asset finance, invoice discounting, lease commitments, telephone contracts etc. They may well have forgotten about some from the past. Plus, how would you value the extent of the liability anyway? (i.e. the value of the total debt initially guaranteed, but which may be reducing or even fluctuating?)
- Not everyone appreciates that a PG can be what is known as a ‘Continuing Security’. A Guarantor would be entitled to assume that when the company had repaid the underlying debt their PG would be cancelled. It often isn’t and it can sit there to be looked upon in the lenders eyes for subsequent borrowings. I’d say that was not good practice (on the part of the lender) but it has happened.
- It is possible to take out insurance to cover the possibility of a PG being called upon. It is rarely used (it is perceived as expensive perhaps) but why are lenders not insisting on it – as they can with life cover for example for a mortgage?
It shouldn’t be read into this that I disagree with PG’s – as a seasoned lender from the past I fully appreciate their worth (beyond the financials too). However, the proliferation of them and some lax practices do concern me. Most of all: when is there going to be a central register of what PG’s have been given??
I’d say such a ‘depository’ would also be of interest to Company Directors who could be surprised at the extent of their commitments and what remains on lenders books.
It’s time for the lenders and credit agencies to sort this one out.