In January 2018, the Financial Conduct Authority ("FCA") opened a consultation on the role of the Financial Ombudsman Service (“FOS”) and whether its services should be extended to incorporate more SMEs and personal guarantors.
It seems the world of finance has developed into a “computer says no” environment, both in a personal and commercial capacity, where old school underwriting and case-by-case common sense approach has been replaced by algorithms, referencing and an increasing dependence on other fintech tools to assist a decision.
I read a few weeks ago that China is planning to introduce a citizen credit scoring system, which is almost a way of correlating a human being with the political agenda. This will affect a citizens’ ability to get promotions, credit or even to leave the country to go on holiday! Scores will improve for good behaviour, having a job in a nationalised industry, buying Chinese goods and will decrease based on bad public behaviour, purchase of foreign goods or even how many units of alcohol you consume. One beer too many and you could get refused for a mortgage or get overlooked for that promotion you wanted!
The fact of the mater is credit score is such a huge part of our ability to achieve so many things in day to day life it is vital that you know how to manage it. Ultimately this could be the difference between getting the finance you want and settling for a rate because there was simply no other option to achieve your goal.
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You co-signed a personal guarantee for your spouses business loan and now you’re faced with losing everything you own and bankruptcy. How did you get to this point and was there any way you could have prevented it from happening?
With around half of UK start-ups failing within five years, personal guarantees may mitigate the lender’s risk, but they represent a huge risk across the SME community. That risk often extends to spouses and family members if a lender calls in a personal guarantee.
Recent research showed 55% of SME owners were unable to describe a personal guarantee and more than 60% were unaware their personal assets are at stake. Understanding these risks is not only a must for the business owner, but also for the spouse or partner who may have co-signed the guarantee.
International accounting standards suggest that business accounts should record guarantees based on the following conditions:
Guarantees are treated as provisions if a call is likely (typically numerous similar guarantees treated as a group)
Guarantees are treated as a contingent liability and not recorded in main accounts if a call is not likely (typically one-off guarantees)
But what about personal financial statements?
There is no set rule, however, if a director is required to provide a personal financial statement for a lender (to help support a business loan) a personal guarantee is surely a material fact that the lender would expect to be included as a potential future liability. After all they may also be asking the director to sign another guarantee.
If a personal financial statement is prepared by an individual or their wealth manager for the individual then of course a personal guarantee must be noted as a potential liability. The calling in of the guarantee may have a dramatic impact on their future planning and so must be considered in wealth management/financial planning.
Every business needs capital to grow and a good regular cashflow is the life blood of all enterprises. Achieving that can often be more difficult and too often businesses are simply financing a bad debt hole.
Most people accept that in order to start a business it will require investment in a number of forms; money, time, energy and probably a fair degree of hope. Those funds may be readily available from external sources like banks, peer to peer lenders, friends, family, grants, even credit cards. So often the drive and vision for the new enterprise overshadows the actual monetary return on the investment and the negative impact of cashflow is felt. Most business owners have an incredibly positive outlook and accept that risk is part and parcel of reward. Many carry this mindset into their sales strategy and whilst the value of sales may be consistently good it’s the collection of invoices that most defines cashflow.
We are currently the only underwriters of Personal Guarantee Insurance in the UK. Several others have made interesting noises about entering the market but with current levels of uncertainty over Brexit and the effect on various trading sectors they have so far been reluctant to dip their toe in the water.
Being the only insurer in the market makes for a greater sense of responsibility. For many company Directors this may be the first time they have been asked to provide a personal guarantee and they are reluctant to commit without insurance. For those that are married this may be the first time their spouse has had to obtain independent legal advice specifically on the true effect of signing a personal guarantee. As you can imagine, the knowledge that all of their personal assets are being exposed upon a single signature can also reduce their desire to commit to the finance they need to grow.
March 2019 sees a couple of fairly major events for me. First of all, I hit sixty, something I’m ill prepared for and to be honest I’m probably looking to come to some sort of a deal to remain at 59. Then just over a week later is the matter of a Brexit Exit. I’m not sure that Theresa May is having a better time here either. Over the last few months she’s learned to dance like me, wear bad suits and look increasingly old, we’ve a lot more in common that I first thought. Meanwhile I have no more knowledge of the full ramifications of the effects of a deal/no deal/no idea deal than I had when the word “Brexit” first appeared on my news feed a few years back. However, I now receive calls from policyholders every week describing their fears of the potential effect on their business post Brexit. Some are very real fears, some are simply fear of the unknown.
There are an estimated 4.5 million Personal Guarantees signed by company Directors in the UK alone. Since the recession it’s rare to find a lender that doesn’t ask for a Personal Guarantee if they are extending facilities to a limited company. Most Directors are reluctant to sign Personal Guarantees for the simple reason that if everything were to go wrong the likelihood of losing their home is amongst their greatest fears.
Accompanying the Personal Guarantee is normally a request to seek independent legal advice as to the enforceability of the guarantee and to acknowledge the likely effect on personal assets should the Personal Guarantee be called in.
The FCA's July discussion paper invites us to share our opinion on the ‘duty of care’ we owe our clients. Its asks for interested parties to consider: