Downing Street has reprimanded banks attaching stringent conditions to new emergency loans backed by the UK government’s bailout scheme, promising to “take all action necessary” to ensure the measures are passed quickly to companies.
Lenders have been criticised for insisting that borrowers provide guarantees such as personal property to get the state-backed loans. This means that should the business go bust, the owner could lose these assets.
The government guarantees up to 80 per cent of the value of the loan for the bank once it has recovered assets from the business owner, including personal savings and property, although their primary residence is protected.
The need to give personal guarantees means that the risk of loan lies primarily with the borrower, even as business owners urgently seek funds to keep their companies going despite increasing uncertainty over their future in the face of the coronavirus crisis.
Last week, the government promised to cover the first 12 months of interest charges on loans of up to £5m for small businesses as part of a £330bn programme to support British industry through the pandemic. The scheme went live on Monday morning.
A Downing Street spokesman said: “We will take all action necessary to ensure that the benefits of the measures are passed on to business and consumers.”
On Thursday, Barclays, Royal Bank of Scotland, Lloyds Banking Group, Virgin Money and HSBC said they would not ask customers for personal guarantees on loans up to £250,000, but added that security on larger loans would be decided on a case-by-case basis and could include personal guarantees.
Simon Gledhill, managing director at Dodd, a Lancashire-based engineering group, said that the set-up of the scheme was a “disaster waiting to happen”. He wrote to the chancellor this week to highlight the issue, saying that “UK business is disintegrating daily and needs cash to support it but not secured by the very people who are trying to save these businesses”.
He added: “The risks for SME owner/managers are massive and what they are being asked to sign up for is too risky, their livelihoods and those of their employees are being thrown on the roulette wheel.”
In a letter to Mr Gledhill’s business seen by the FT, Lloyds wrote that “the government terms of this support are that the directors/shareholders of the business [personally guarantee] the full amount and there is a debenture taken”.
It added: “You will be liable for 100% of the debt in a worse case scenario. The government 80% backing sits behind your [personal guarantee].”
It is standard practice at many lenders to take personal guarantees when extending loans to small businesses that lack other types of security.
The rules of the government scheme state that banks are required to take some sort of security for loans over £250,000, and the state-backed British Business Bank told lenders on Monday that “if your policy is to take security [on loans] below £250,000, we expect you to do so”.
One bank boss said: “The chancellor thinks the banks are not doing enough. But the scheme design obliges us to follow normal credit procedures. They need to rethink it.”
On Wednesday, the chancellor, the governor of the Bank of England and head of the FCA wrote to the chief executives of major banks urging them to keep businesses afloat by passing on the benefits of the government’s loan schemes.
But Sacha Bright, chief executive of Nextfin, an alternative finance group, warned that “funders and banks will not take on the risk of the businesses that will fail because of the virus”.
He added: “Expecting business owners to sign [personal guarantees] won’t work and many will not have the credit rating or security to support it.”