UK SME loans: banks are guaranteed trouble in their push for home rule

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Bankers, according to an age-old gripe, are fair weather friends. Money lent in sunshine is reclaimed when it rains. Worse, lenders can inflict devastating personal misery if a loan backed by a personal guarantee turns sour.

The scope for abuse has prompted a small business lobby group to file a “super-complaint” to the UK’s financial regulator. The Federation of Small Businesses wants action against banks that make excessive demands on small companies to provide personal guarantees. 

The FSB argues that when loans are small — say under £25,000 — personal guarantees are superfluous.

A minority of loans officers behaved dreadfully during the late 2000s financial crisis. Some threatened to recall loans unless borrowers put up personal guarantees backed by their family homes. Others pushed “distressed” SMEs into bank divisions with a penchant for asset stripping.

The extent of today’s problem is unclear. Personal guarantees have doubtless increased since the pandemic, but there is little data. More is needed.

Banks claim they are not heavy handed about calling in guarantees, because it is reputationally risky and legally costly. They say that guarantees signal an owner’s belief in their business and may merit lower loan rates. The risks are not one-way. In the early 1990s, lenders suffered huge losses from loans to the sector.

This time round, the risks appear manageable. The banking sector is well-capitalised, with an aggregate common equity tier one capital ratio of 14.8 per cent in the third quarter. For the median small company, income growth has kept up with higher interest payments, according to the Bank of England. Companies with pandemic-era guaranteed loans are insulated from higher rates until at least the end of their six-year fixed term.

But some companies are vulnerable. Banks are demanding interest of over 11 per cent from almost one-third of would-be borrowers, says the FSB. The number of corporate insolvencies in the year ended September 30 increased 17 per cent to 24,326. That is not far off the 2009 peak of 26,000, although the number of SMEs has increased by nearly a fifth since then to 5.6mn. 

An optimistic take on the FSB’s super complaint is that it marks peak strain for UK SMEs. The shake-out is all the more painful in cases where the dividing line between business and home life is blurred.

The Lex team is interested in hearing more from readers. Please tell us what you think of banks seeking personal guarantees from the owners of SMEs in the comments section below.