Banks backtrack on personal guarantees after public backlash
Following growing criticism, high street banks have backtracked on loan requirements which insisted that business owners provide personal guarantees for government-backed loans.
Yesterday, Barclays, HSBC and Lloyds Banking Group all set out new terms for the state-backed emergency credit scheme after concerns that business owners would be personally liable for bank debts underwritten by the taxpayer.
The banks set out their terms after the Royal Bank of Scotland set an example by being the first bank to offer loans without requiring personal guarantees from business owners.
The new approach will mean that any director who secures up to £250,000 through the COVID-19 Business Interruption Loans (CBIL) from one of the four biggest retail banks will not have to sign a personal guarantee.
Barclays has issued an apology, after customers were quoted interest rates of as much as 12% for the credit, despite the fact that Bank of England rates are at record lows. Barclays said it was reviewing all applications made this week to “ensure no errors are made” and said no successful applicant would have to pay more than 5% for one of the loans.
Under the COVID-19 Business Interruption Loans (CBIL) scheme, the state will underwrite 80% of the risk of bank loans of up to £5 million. However, borrowers are liable for the entire debt, as the taxpayer guarantee is purely for the banks’ benefit, intended to give them confidence to lend to businesses that they may otherwise avoid.
Yesterday, the UK Government announced said that no lender was allowed to “take a guarantee against the borrower’s home.”
It added that it would take all action necessary to ensure that the benefits of the measures are passed on, The Times reports.
However, second homes and other personal and business assets could still be at risk. Despite the improved terms being offered by some lenders, directors of companies seeking over £250,000 in funding, could still be asked to sign personal guarantees by banks including Barclays, Lloyds and HSBC.
However, banks must exhaust all recovery action against borrowers before they can claim on the state guarantee.
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