Robert Moore, chief technology officer of insolvency practice KSA Group, explains how and why personal guarantees can be risky yet also beneficial to lenders
Lenders, landlords and suppliers will usually ask for a personal guarantee (PG) from company directors before agreeing to a deal.
It is a way for lenders to protect themselves if the company becomes insolvent. The PG means an individual, such as a company director, is personally liable for the debt, not the company. Even though the loan was used for the business.
This practice is especially common in the alternative finance market and peer-to-peer lending industry. For example, Funding Circle have lent small businesses around £2bn – each loan personally guaranteed. In the event of default, the PG will be called upon.
Of course, many lenders will rarely lend on the basis of a personal guarantee. If the business is sound and has very good prospects, they will lend even if the directors do not have much in the way of personal assets.
However, lenders will want to see a degree of commitment i.e. show they have invested in the business. Sometimes wealthy people will not be approved for a loan as the proposal or even the business itself does not stand up to scrutiny.
Can PGs be risky?
What if a borrower owes many different lenders and has several personal guarantees? There is the risk that lenders are relying too much on the personal guarantee.
No one can foresee the future. If there is a recession of some kind, then many ‘sound’ businesses could fail.
This will have a knock on effect as personal guarantees begin to get called in. This should be relatively manageable if a director has taken one loan, like they would a mortgage, for their business.
The problem is quite a few directors have taken out multiple loans with multiple personal guarantees.
How do we know this?
Because we talk to directors of companies in financial distress and they tell us this is the case.
Is it possible for lenders to find out what proportion of loans a company takes out that are backed up by a personal guarantee?
The simple answer is no. Charges are registered at Companies House, mortgages are registered on properties, credit card companies liaise with other card companies by sharing information on credit check databases but personal guarantees have no register anywhere.
Many of the new lenders claim they have sophisticated systems and algorithms that go beyond the normal credit check, which to extent I’m sure they can, but perhaps these systems can only reveal the situation the business is in now.
Lenders cannot predict the future. One national lender recently told me they were concerned their book was “stacked”. They were worried the borrower had made multiple personal guarantees.
At KSA Group we are looking for partners to assist in setting up a register of personal guarantees that can be searched by potential lenders.
No lender to date has been prepared to release details of clients with PGs to any other lender for obvious reasons. It is a highly competitive market. However, insurers share information on claimants, so why can’t the lenders?
With new technology, like biometric systems, it is possible to hold information on people without any actual personal information being shared.
All that is needed is something unique to the individual and/or business. In the case of school lunches, it is the child’s finger print. For business, it could be something as simple as their email address or company registration number which won’t be shared later on.
Let me explain...
The borrower’s email address or registration number is translated into a unique reference number, plugged into a website or portal, that can be shared with other lenders.
Lots of information can be attached to this unique ref number without giving away the borrower’s identity and personal information - not even their email address.
For example, a unique reference could provide information on the number of personal guarantees a borrower has without needing to state who the lenders are.