BUSINESS LOANS/ REVOLVING CREDIT/ ASSET LEASING PGs
The behaviour of the high street banks and the banking crisis of 2008 changed the shape of business lending forever, particularly for SME businesses.
The high street banks now lend relatively little to SME businesses and, since the early 2000’s, the space has been filled by a new tranche of lenders, such as Capital on Tap, Federal Capital, Fleximise, Funding Circle, IWOCA, JCF (JustCashFlow, now in administration), LDF (White Oak), YouLend, to name but a few.
Much of this type of lending carries a stiff penalty in the event of default, in that the whole sum, including all future interest becomes immediately due, and therefore the guarantor can be pursued for this whole sum from that time.
So, if a business is lent £100k at 29% interest per annum compounded monthly, repayable over five years, and the company defaults after just 3 months, the debt immediately becoming due by the guarantor is over £400k.
If you are a guarantor, particularly a director, it is no use arguing that it is irresponsible lending; that is a term limited to personal regulated debt. As a director, you are assumed to be a responsible borrower. The UK retail banks, because of their complicated relationship with the government, might be more cautious in this regard because of their behaviour prior to 2008, but the lenders such as those listed above are not bound by such scruples.
This is the same when it comes to most asset leasing agreements, and some hire agreements do not even allow for the value obtained under the asset sale to be offset.
HOW AGGRESSIVE ARE THE LENDERS WITH GUARANTORS ON DEFAULT?
This varies; some are reasonable in their approach which tends to lend to a better outcome for all involved, others issue statutory demands for bankruptcy very soon after default, some insist on a county court judgement to secure their position.
Many of these organisations rely solely on personal guarantees as a form of security; given their more than favourable outcome on default of the agreement (i.e. they get all their future monies due secured by the guarantor upfront without having to wait for the outcome of the corporate insolvency), why wouldn’t they?
In a few cases, the liability can be contested, but this is rare these days; you can see where this is a possibility by reviewing our breaking news articles on specific creditors HERE
HOW CAN YOU MITIGATE?
There are very few lenders who will not insist on a Personal Guarantee, You should look across the market and perhaps use a reputable broker who knows the market and have a clear understanding of the amount the company can afford to repay; if you approach too many parties on your own company’s account, your company’s credit rating takes a dive due to too many enquiries, and then you are left having to deal with the more aggressive sharks.
In some, but by no means all cases, you can negotiate a cap on the PG. Finding the most competitive interest rate helps mitigate the overall potential liability, do but take extra regarding any compound interest; daily compounding will have an extreme devastating effect on the balance compared to annual, for example.
IF YOUR BUSINESS IS ALREADY IN A HOLE… you had better be very, very sure that the hole can be dug out, otherwise using this type of lending will just make the hole bigger; and one that you are personally going to have to fill if it defaults.
If your business is struggling financially, then get help to understand better about the chances of recovery and what options are out there rather than using punitive borrowing with personal consequences.
