At a time of great crisis, with many businesses closing down, people being asked to stay at home, protect the NHS and save lives, taking an 80% government-backed business loan offered by the Chancellor of the Exchequer will naturally feel like an olive branch. After taxpayers’ money was used to bail out the banks in 2008, bailing out businesses and bailing out the people sounds like justice. However, after investigating this as a business owner, I found that the way it works in practice is very different to how it was presented, and very little has been said on the matter.
The initial interpretation is that if you borrow £100,000 to support your business, and despite best efforts, were unable to pay back the loan, the bank could claim £80,000 from the government and potentially lose £20,000. It is understandable that the bank would need to exercise some due diligence in order to mitigate this risk. People can be forgiven for believing this is how it works because this is what Rishi Sunak implied when he announced the scheme to help businesses. Now let’s move on to how it really works in practice.
Assuming the same borrowing requirement, an application is made for £100,000 to keep your business up and running during the coronavirus lockdown. The first thing the banks want to know is how much property the business owns, how much property you own personally as the business owner, and any other assets which can be used to secure the loan. This is also understandable if you look at this from the point of view that you are asking the bank to take 20% of the risk. On borrowing £100,000, understandably, you will need to offer £20,000 assets to secure the loan against it, or credible cashflow projections which offset this risk to the bank. However, what is missing in all this, if you don’t ask, is the process that is followed in the event of your business defaulting on the loan.
Again, back to the £100,000 loan example. The applicant is asked about assets and reports that his business has no property at all, and very little in the way of valuable equipment with any resale value. However, the applicant has equity in his home in the region of £50,000, and the loan is accepted on this basis. This is more than adequate to cover the £20,000 after the government pays the 80%, but this is NOT how it works.
This is how it works. In the event that your business defaults on the loan, the bank will start by coming after you for the £50,000 equity in your home. Then, and only then, they will go to the government and claim 80% of the outstanding £50,000 of the loan; the £40,000 leaving an outstanding loss to the bank of £10,000. A number of journalists and politicians have brought up the subject of why should it be an 80% loan guarantee scheme, and why not 100% with the government taking all the risk. The fact is, changing it from 80% to 100% is absolutely useless for businesses and their owners. An increase from 80% to 100% will ONLY take away the remaining risk to the banks. Essentially, it is a loan guarantee for lendors, not a loan gurantee for borrowers.
Information security consultant with over 20 years’ extensive experience gained across a diverse range of private and public industry sectors including insurance, banking, telecommunications, health services, charities and more, both in the UK and internationally. Graduated in 1997 with a software engineering degree and specialising in cyber security, risk analysis, compliance reporting and access management.