Will The Banks Play Fair On Emergency Loans To SMEs?

Will Britain’s small businesses be able to use the Coronavirus Business Interruption Loan Scheme (CBILS) that the Treasury has pledged will supply life support to struggling firms? There are worrying signs that many may not – since the scheme opened its doors on Monday, many businesses have expressed their fears about the onerous terms being imposed by some lenders.

On the face of it, CBILS looks to offer salvation to small firms whose business is being hit by the COVID-19 pandemic. Businesses with an annual turnover below £45m are entitled to apply for a loan of up to £5m from around 40 commercial lenders participating in the scheme; crucially, the Government has pledged to guarantee 80% of each loan granted, which should help banks feel more comfortable with accepting applications for credit.

However, here’s the catch. Each lender taking part in CBILS sets its own terms – and some appear to be putting small businesses in a very difficult position.

Most worryingly for directors of companies seeking support, banks are asking for personal guarantees on business loans. The Government’s guidance is that lenders do not have to ask for any security at all on loan facilities worth less than £250,000. However, it also says this is at lenders’ discretion and some providers are taking a more conservative view. One leading high street bank, for example, is understood to be asking directors for personal guarantees on loans of more than £25,000, as well as additional security on larger advances.

In these highly unpredictable times, very few directors are going to feel comfortable accepting such conditions. Nor should they. With so little certainty about how long the economic impacts of the COVID-19 crisis will last, it would be madness to accept a legally binding agreement that could have disastrous consequences for the borrower and their family. The worst-case scenario is that a personal guarantee on a loan that can’t be repaid would leave the directors of the business facing bankruptcy and the loss of their family homes.

Are the banks behaving unfairly? Well, in normal circumstances, personal guarantees are a common feature of business lending, particularly where a small business is short of assets of its own, or has limited balance sheet strength. Lenders naturally want to protect themselves. Here, however, that protection is already in place – the 80% guarantee from the Government means banks will be able to recoup most of their losses in the event that the borrower defaults. Asking for a personal guarantee – particularly for the whole of the loan rather than just the 20% of it that isn’t underwritten – therefore seems unreasonable. Several banks have already made it clear they won’t operate this way.

Watch out too for profiteering. Some businesses complain they have been quoted interest rates of up to 12% a year on the CBILS. That seems remarkably high for what is a low-risk loan from the bank’s perspective, particularly at a time when the Bank of England is slashing the cost of borrowing and relaxing funding rules for the banking sector.

The message for small businesses here is that it will be important to tread carefully. You’re under no compunction to seek funding from your main banking partner and shopping around for the best deal – on both terms and cost – will be important. Don’t make a bad situation worse by taking on borrowing that could have huge implications for your personal finances.

As for the banking sector – and those delivering this scheme, including the Treasury and the British Business Bank – this should be a time for reason, fairness and compassion. Lenders can’t be expected to expose themselves to undue risk, but any bank engaging in exploitative practises should be ashamed of itself.