The Federation of Small Businesses (FSB) has issued a
super-complaint to the Financial Conduct Authority (FCA) to
highlight the harsh lending practices of banks that excessively
demand personal guarantees for business loans.
Personal guarantees can be a “straitjacket” on business growth,
forcing entrepreneurs to put their homes or other assets on the
line when taking out finance.
This can be particularly paralysing when they are applied to
small loans – leaving many business owners more likely to abandon
their business or growth plans or push them into being
over-cautious in their decision-making, deterred from making bold
choices.
FSB is therefore proposing that the FCA undertake work to assess
the extent of this practice, and then consider asking the
Treasury to expand its regulatory perimeter to help more small
businesses affected, typically limited companies where directors
provide personal guarantees.
FSB is a designated consumer body by law and therefore has the
ability to send a super-complaint to the FCA when the issue
becomes troubling enough for a large number of small firms whose
individual complaints may not get the same hearing.
Our super-complaint sets out a number of other ways that overuse
of personal guarantees may be damaging small firms, including:
- Businesses are put off from proceeding with loan
applications, so forgo the capital necessary to grow or are
forced to seek out more expensive forms of capital.
- In some cases, individuals may give personal guarantees which
they then take insurance against – an unnecessary additional
expense in cases where the guarantee relates to a loan which is
easily affordable for the borrower.
- In the event that a small loan backed by a personal guarantee
is declared in default, individuals and their families may
experience significant distress which is disproportionate to the
loss or potential loss which the lender faces.
- There is at least the potential for lenders to use the
presence of the personal guarantee to gain influence over the
decision-making processes of distressed businesses to their own
advantage.
Depending on the approach of individual lenders, market
distortions in small business lending and the wider economy may
arise if certain sectors receive less favourable treatment
regarding demands for personal guarantees.
Currently, personal guarantees most often apply to loans taken
out by companies which are guaranteed by their directors. This
type of lending is not covered by FCA regulations, likely because
the concept of limited liability meant the risk of financial
detriment to individuals was assumed to be low.
However, the use of personal guarantees has undermined this
argument, greatly reducing the kind of risk-taking by business
owners that the concept of limited liability was originally
developed to encourage.
If the regulatory perimeter is expanded, the FCA should make
specific rules for lenders regarding the use of personal
guarantees in lending to companies, which balance the interests
of borrowers and lenders appropriately.
FSB's National Chair Martin McTague said:
“Put yourself in the shoes of an entrepreneur who's created a
promising business and is keen to grow. You approach your bank
for a small loan, but they say you can only have the money if you
sign a personal guarantee which would ultimately put your family
home or other assets at risk. This is a straitjacket on small
business growth.
“It is no wonder that many small business owners in that position
are telling us they are choosing to avoid external funding which
they could be using to capitalise on new opportunities.
“It's bad news for the individual business – and, zooming out,
it's bad news for the economy as a whole, at a time when we're
looking for economic growth and productivity gains.
“For amounts which are triflingly small for banks, but
potentially transformational for small business owners, a strong
dose of proportionality is required rather than a blanket
imposition of personal guarantees.
“With interest rates having risen so sharply over the past couple
of years, the availability and affordability of new finance for
small firms has declined. Adding in personal guarantees on top of
higher rates is clamping down on small firms' appetite and
ability to grow and invest.
“Small firms are by definition the ones with the most potential
to grow, and to go from start-up to scale-up. The FCA needs to
find a balance so that lending is neither overcautious nor
reckless, and the sensible steps we have set out in our
super-complaint would be a great place to start.”
