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Are personal guarantees holding CBIL lenders back?

Following my previous article around the need for a greater scale for the Coronavirus Business Interruption Loan Scheme (CBILS), it has been interesting to see new lenders joining the CBIL panel while many more are ready to join the Scheme. The key now is to ensure the quick and efficient distribution of the loans to SMEs.

In the past week, the British Business Bank has announced that it has approved new lenders for accreditation under the CBILS: The Co-operative Bank, Cynergy Bank, OakNorth Bank, Starling Bank, Funding Circle and Coutts as part of RBS Group’s existing accreditation. However, the number of new lenders needs to grow as quickly as possible to release much needed capital for SMEs which are now five weeks into this crisis. The current set up is at bottleneck; On one side, the panel includes many product specialist lenders which can only help businesses with certain aspects of lending and on the other side, most banks have announced that they can currently only help borrowers with whom they have an established business relationship with. We are currently being told that this is being addressed and lender assessments are being fast-tracked, however, it’s still unclear how long it will take to so see a wider range of lenders on the panel.

The second issue which could potentially inhibit the process is that the lending decisions ultimately rest with the individual lenders. Even though the eligibility criteria for the Scheme is set by the British Business Bank, the individual lenders can still apply their normal commercial lending practices and criteria. The terms of the Scheme were recently changed to make the process more straightforward. For the CBILS loans, lenders will be prevented from requesting personal guarantees for loans under £250,000. The aim is to speed up lending approvals as the government will continue to cover the first 12 months of interest and fees. But is this enough to reassure lenders? 

Personal guarantees have long been a part of SME lending so asking lenders to lend their capital without such guarantees is causing concern among lenders who are considering joining the Scheme, making them hesitant to get involved. This has in fact resulted in one of the CBIL panel lenders, Newable Lending, to pausing their lending activity for the time being despite still being on the panel.  

Announcing the abolishment of personal guarantees was a smart political move and, according to the Chancellor, the aim was to help as many businesses in need as possible. Commenting on the changes on personal guarantees, Sunak said that more businesses should be able to benefit from the Scheme. One of the things to consider though is that as the Scheme doesn’t offer full guarantees to lenders, they are still at risk of losing their capital so they are keen to mitigate this as much as possible. 

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Many lenders have argued that while there is an immediate need for funding, they have a responsibility to their shareholders and to taxpayers who will ultimately be the ones guaranteeing these loans. They want to be able to lend responsibly and are currently considering how the lack of personal guarantees would influence this and Director behaviour over the six-year terms of these loans. Some have already expressed the view that the absence of a personal guarantee could create a ‘moral hazard’ leading companies to borrow more than they require and taking greater risks than they would have done in the past. 

This stipulation is clearly stifling the flow of credit at a time when businesses need it the most, so finding a way to provide lenders with the security they require can really make a difference here. We believe it is imperative for the government to explore different avenues to ensure the Scheme is a success. Introducing the operation of a two-tier market where borrowers are given a lower loan rate with a personal guarantee and a higher loan rate without a personal guarantee could be a viable solution. Another potential solution would be for the government to increase its guarantee to compensate, although ultimately this would be coming out of taxpayers’ pockets. 

Alternatively, the Chancellor could revisit the changes and allow lenders to apply personal guarantees where necessary. Operationally this would be the easiest solution but certainly the most unlikely as it would require a big U-turn of the government which has so far shown great capacity to listen to constructive comments to improve the scheme without being afraid to implement them. In the coming weeks we can expect things to change rapidly so we’re hoping that the Government will take into consideration the fast pace required to truly help already struggling SMEs.


Sean O’Farrell is an entrepreneur and Managing Director of long-established finance brokerage Choice Business Loans which helps businesses access traditional forms of finance, as well as alternative ways of raising finance such as peer-to-peer lending, crowdfunding and merchant cash advances

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