LAW SOUTH EAST 21
Should you bet the house on it?
The words of the late Bob Hope still ring true: “A bank is a place that will lend you money if you can prove that you don’t need it”. Business owners are increasingly under pressure to put up their family home as security to borrow. There are other options available, says James Hawkeswood, corporate finance partner at Blake Lapthorn in Southampton.
Research carried out by the Forum of Private Business this summer concluded that banks are asking for increasingly “harmful levels of collateral in return for finance” to small and medium-sized-businesses. Repossession in today’s market is a very real threat and it’s not necessarily your home you need to put on the line.
Ever-tougher credit scoring systems with applications for funding by small businesses have become the norm. The criteria that these applications are judged by include a prior credit history, a track record of running a profitable business, and a willingness to invest their own money in the business. If any of these is not met, inevitably, some form of security is likely to be asked for; in many instances this will be the family home. In an uncertain economic climate, the potential for repossession is very real.
Alternatives Before putting up your home as collateral for a loan, consider the alternatives. Business assets, such as IP, stock or premises, could be given as security instead. Personal assets, for example, personal savings or an inheritance, might also be enough.
If your own assets are lacking, someone else may be willing to assist you financially. A family member, or even a trade supplier or customer keen to see your business succeed could help, although bear in mind the strains that may result if you are unable to meet planned repayments.
A venture capitalist or an angel investor could be another option. However, their involvement will usually come with a say in your business’s decisions, as well as, importantly, equity in your business. Ask yourself whether you would be willing to give up a stake in your company in return for their money.
Personal guarantees
In any case banks’ attitudes to financing SME growth is unlikely to change in the short-term; from their perspective such businesses remain a risky investment. A personal guarantee (PG) is a common way to borrow, despite trumping the limited liability that protects a company’s directors or shareholders, putting a guarantor’s own assets on the line. Indeed, most successful entrepreneurs are characterised by their willingness to take such a gamble: backing themselves and reaping the rewards for doing so. But it is clearly sensible to minimise risks:
• Check whether the PG is secured or unsecured. Although unsecured is clearly preferable, if the bank uses your home as collateral, it will be a secured loan.
• Make sure your obligations under the PG are limited. Are you comfortable with your exposure under the loan? It is important to understand what that means for you, and take suitable professional advice on this.
• Monitor the situation. Check the terms to see whether it may be possible for you to ask for the PG to be released if your business picks up.
• Consider at the outset what happens if you were to terminate the PG. Would the bank pull the funding? If there are multiple guarantors, what would happen if one wants to terminate?
• If your home is owned jointly by a spouse or partner, bear in mind that that person will need to be separately advised before consenting to a PG over the family home.
The most important thing is to take quality advice to ensure you minimise risk as far as possible and are aware of the options which are available to you.
Details: James Hawkeswood 023 8085 7054
www.bllaw.co.uk
Government assistance
The Funding for Lending Scheme is designed to encourage banks to lend to the UK’s ‘real economy’ including small to medium enterprises. It involves the Bank of England lending money to UK financial institutions at a cheaper rate, with the price and quantity of funding provided linked to the performance of the relevant institution in lending to the UK economy.
The Enterprise Finance Guarantee (EFG) is a loan guarantee scheme to facilitate lending to ‘viable businesses’ that have been turned down for a normal commercial loan.
The Enterprise Capital Fund (ECF) Programme offers commercial funds that bring together a combination of private and public money to support new businesses with potential for growth.
For further information on these and other initiatives visit:
www.gov.uk/growing-your-business
www.gov.uk/government/policies/ making-it-easier-to-set-up-and-grow-a- business--6
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – OCTOBER 2013
www.businessmag.co.uk
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