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Coronavirus – comment on Chancellor’s overhaul of business bailout scheme

Chancellor Rishi Sunak has announced an overhaul of the government’s bailout scheme for businesses affected by Coronavirus, in response to mounting criticism.

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Published 3 April 2020

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Banks will be banned from asking small firms for personal guarantees on loans up to £250k only, and will relax other rules to ensure businesses can access the money they need.

This further intervention from the government is very welcome. Personal guarantees put all of the guarantor’s personal assets at risk and the usual terms are very onerous. They are a very strong weapon for the bank when dealing with borrowers in financial difficulty, even if temporary.  In the wake of the 2008 crisis banks demonstrated their willingness to use personal guarantees as strong leverage over business owners to negotiate changes to loan terms that seriously disadvantaged borrowers and benefitted the bank.

The government’s guarantee is to the lender not the borrower and so the bank will need to have attempted to use court enforcement measures or the bankruptcy process to try to obtain payment from the guarantor as the first source of payment.

The government assures business owners that their home will not be required as security but if the outcome is that the company does not recover and cannot repay the loan and if the guarantor cannot pay then the bank will be able to make the guarantor bankrupt and if the guarantor owns their own home (or part of it) then that will form part of the assets available to creditors to repay the debt and can be sold to do so. Limiting the sum required to be guaranteed to 20% of borrowings is a welcome measure but still requires business owners to take huge risks with their personal assets at a time when no one knows what the future holds for any business.

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Shorter Reads

Coronavirus – comment on Chancellor’s overhaul of business bailout scheme

Chancellor Rishi Sunak has announced an overhaul of the government’s bailout scheme for businesses affected by Coronavirus, in response to mounting criticism.

Published 3 April 2020

Associated sectors / services

Banks will be banned from asking small firms for personal guarantees on loans up to £250k only, and will relax other rules to ensure businesses can access the money they need.

This further intervention from the government is very welcome. Personal guarantees put all of the guarantor’s personal assets at risk and the usual terms are very onerous. They are a very strong weapon for the bank when dealing with borrowers in financial difficulty, even if temporary.  In the wake of the 2008 crisis banks demonstrated their willingness to use personal guarantees as strong leverage over business owners to negotiate changes to loan terms that seriously disadvantaged borrowers and benefitted the bank.

The government’s guarantee is to the lender not the borrower and so the bank will need to have attempted to use court enforcement measures or the bankruptcy process to try to obtain payment from the guarantor as the first source of payment.

The government assures business owners that their home will not be required as security but if the outcome is that the company does not recover and cannot repay the loan and if the guarantor cannot pay then the bank will be able to make the guarantor bankrupt and if the guarantor owns their own home (or part of it) then that will form part of the assets available to creditors to repay the debt and can be sold to do so. Limiting the sum required to be guaranteed to 20% of borrowings is a welcome measure but still requires business owners to take huge risks with their personal assets at a time when no one knows what the future holds for any business.

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