When Providing short-term property finance, like refurbishment and bridging loans, not only does a lot of effort go into delivering the funds on time, but also into ensuring the loan can be redeemed at some point in the future.
Despite dire warnings surrounding the UK economic outlook, post-Covid and post-Brexit, the property sector continues to perform, attracting an increasingly large slice of the UK’s inward investment.
Data from Hamptons International at the back end of 2019 showed the number of landlords based abroad who let out property in the UK was around 11% of the total market share, compared to 7% in 2018 - the first rise in a market that had been declining since 2010.
An example close to home
In a recent deal we were trying hard to complete for a client, the property company concerned featured two directors, both with a 50% shareholding, but one a foreign national based in the Far East. It’s not a problem, but circumstances highlighted an issue in our standard lending policy.
One of our lending criteria is to request a personal guarantee from all directors of companies we are providing funds to, and any shareholders with a 20% or more share in that company. In this instance the UK-based director was happy to provide the PG, but not the director overseas.
With a satisfactory credit profile and enough net-worth to cover the loan on their own, we can happily forego the PG from the foreign national in this instance, but thought it was worth explaining what a PG is and why we insist on them.
What is a Personal Guarantee?
A personal guarantee (PG) is an assurance that any borrower will personally repay a loan, should the business receiving the funds, of which they are a director or shareholder, fail to do so.
Although in the current economic climate the rules around insolvency have changed, typically when a business falls into insolvency and is then liquidated, the directors and shareholders cannot be pursued for debts – except in special circumstances
However, the signing of a personal guarantee changes everything and creates a relationship between the directors and shareholders of the business and the lender; if the business is liquidated, they cannot avoid the debt they have agreed to by accepting the loan.
In general PGs are required to support borrowing by companies benefitting from a limited liability status, including Limited (Ltd.) Companies and LLPs. PGs are also necessary for larger projects or development schemes operated through a Special Purpose Vehicle Ltd Co.
Lenders like us, will insist on a PG to reduce their risk of the loan not being repaid in full at the end of the term. If there are problems with the business, a PG ensures the directors and shareholders who have signed a PG will stand by the lender to find a solution, rather than run from the debt.
The level of assurance will not always match the loan amount, but as with all lending decisions relating to short-term property finance, the unique circumstances of the deal and the individuals involved will dictate the level of assurance required by the PG.
When does a Personal Guarantee become effective?
If the business owned and run by the individuals who signed personal guarantees, runs into trouble and the loan repayments are missed, the lender is likely to invoke the PG and insist the outstanding debt is settled in full. Which is why PGs are not something to be entered into lightly.
They are legally enforceable and careful consideration should be given before signing; no one goes into a business expecting it to fail, whether it manufactures widgets or builds houses, but there can be personal consequences.
As with most things in life, an individual can protect themselves against the most serious financial aspects of a PG, by taking out insurance. The amount of cover offered and the cost will vary depending on the unique circumstances of the deal and the business, but it can still offer peace of mind against the cost of personal liability.
In the particular case we were considering, which raised the issue of PGs and our need to explain, the one director is an experienced property developer who sets up an SPV Ltd Co., for each large new project and invites other likely investors to join in the scheme.
The director is very experienced and their own credit profile and net-worth ensures their PG is enough to cover the loan, without troubling the other investors, who may or may not be directors or shareholders.
Hopefully, this blog has explained why Signature, like every other lender, insists on a PG when a limited liability business borrows from us, but as our example demonstrates, we will still be flexible to try and get the deal done.
So, if you are planning a ground-up development project, a bridging loan to purchase, refurbish and re-mortgage a property through your business, please get in touch and we’ll get a Signature on your next deal. Call Michelle Walsh on 07590 848235 or email Michelle@signaturepropertyfinance.co.uk