High-street banks are demanding crippling personal guarantees from small
businesses that are seeking funding under the government’s new Enterprise
Finance Guarantee Scheme.
Banks including Royal Bank of Scotland (RBS), Natwest and Lloyds are requiring
small businesses to sign personal guarantees of up to 100% of loans made
under the scheme, even though the government is guaranteeing 75% of the
loan.
Peter Ibbetson, chairman of business banking at RBS and Natwest, confirmed
that RBS and Natwest are asking for a personal guarantee of 100% on loans
taken out under the scheme, saying that they were doing it at the behest of
the government.
“We take a personal guarantee for the full 100% of the loan, and 75% of that
we would pass on to the government in the event of a failure,” he said. “It
is right that companies using the scheme should provide a personal guarantee
for the full extent of the loan they take out. It is absolutely right that
lenders and the government should make sure that business owners don’t have
the opportunity of simply walking away from their obligations. I don’t think
it is unreasonable that somebody who borrows money should pay it back.”
He added: “We want to support small businesses. But we have to look at it on a
sensible banking basis.”
The Enterprise Finance Guarantee Scheme was set up two months ago to help
small businesses trade through the recession by providing them with loans of
up to £1m, of which 75% is guaranteed by the government.
News of the requirement for personal guarantees has been met with outrage by
smallbusiness organisations, which are already receiving large numbers of
calls every week from worried small firms.
Phil Orford, chief executive of the Forum of Private Business, said: “It is
outrageous. The guarantee scheme is supposed to be lending of the last
resort when small firms have explored every other route. But it is not doing
what it said on the tin. Both government and banks are minimising their risk
by requesting these personal guarantees.”
The demands for personal unsecured loans are causing enormous stress for
smallbusiness owners at a time when they are battling to keep their firms
afloat in the face of tightened cashflow and delayed payments from debtors.
By agreeing to a personal guarantee, small-firm owners give the banks the
power to recover money from them as individuals, meaning they could have to
repay the bank for many years if the business fails.
Barrie Colvin, managing director of IFS Chemicals in King’s Lynn, Norfolk, is
in the process of applying for a £100,000 loan from RBS through the
guarantee scheme.
He said: “The whole point about the scheme is the 75% guarantee. Asking for a
100% personal guarantee is absolutely diabolical. I have a number of friends
who are also running small businesses and we just feel totally let down by
the whole system.”
David Halliwell is managing director of Wessex Metal Stock, a Dorset firm that
sells metal for engineering. He approached his bank Barclays to discuss
taking out a loan under the Enterprise Finance Guarantee Scheme. “They have
informed us that although the government guarantees 75% of the loan, if the
directors have equity they are expected to guarantee 100%,” he said. “This
means it is pointless for us to apply under this scheme – we might as well
just look for a normal bank facility. To my mind the guarantee scheme is one
of those things that makes the government sound good without it actually
having to come up with anything.”
The Forum of Private Business called on the government and the banks to remove
their demands for unsupported personal guarantees. Orford said: “This scheme
should not be requiring personal guarantees from anybody. For this to be
happening is terrible. The scheme should provide struggling but viable
businesses with the money they need. The fact that the individuals are being
asked to underwrite that risk seems to negate the value of the scheme
altogether."
A spokesperson for the Department of Business, Enterprise and Regulatory
Reform, said: “Banks are allowed to ask for unsupported personal guarantees
[under the Enterprise Finance Guarantee Scheme] and that is on the whole
loan facility. The loans are given out by the banks, not by the government
and they are done under their commercial lending criteria. When we are
putting something like this in place we have a certain responsibility to
look after businesses but also to look after the taxpayer.”
Lloyds Banking Group said that it, too, would ask for personal guarantees of
up to 100% from small firms seeking funding under the scheme.
Stephen Pegge, head of communications at Lloyds TSB Commercial, said: “A key
requirement of the Enterprise Finance Guarantee Scheme is that banks apply
their normal commercial approach to assessing viability and setting terms,
including security taken. Where relevant that may include a request for
personal guarantees from directors. The government has confirmed that this
may be up to 100% of the loan so there is some sharing of the risk with
taxpayers.”
Are you angry about the way you are being treated by your bank? We want to
hear from you. Please e-mail us at smallbusiness@sunday-times.co.uk
