Guest Blog: How to Mitigate Risk in Property Development
By Todd Davison, MD of Purbeck Personal Guarantee Insurance
Many property business owners and developers will have faced the tricky dilemma of whether to sign a Personal Guarantee or not to access funding for new or existing projects. Our own research indicates 26 per cent of property and construction business owners were already acting as Personal Guarantors prior to 2020, 26 per cent took the leap last year while 9 per cent plan to become Personal Guarantors in 2021. The housing shortage and initiatives such as the Right to Build scheme are opening up development opportunities to an increasing number of people who will need access to cash to get their projects off the ground.
If you took a CBILS loan over £250,000 in the pandemic then that decision was made for you as Personal Guarantees were required for loans over this sum. The same principle applies to the new Recovery Loan Scheme which replaced the CBILS and Bounce Back Loan Scheme.
However, outside of these Government backed loan schemes it is becoming increasingly commonplace for lenders (banks as well as specialist lenders) to request Personal Guarantees in support of property development projects where monies are being advanced by a special purpose vehicle, i.e. a UK-incorporated company that has been established for the sole purpose of the purchase/remortgage of residential properties for letting.
Signing a Personal Guarantee poses a huge risk to the personal assets of the property business owner/director, but there are now ways that risk can be mitigated.
What is a Personal Guarantee?
Personal Guarantees give the lender a written promise, made by a director or number of directors, to accept liability for a company’s debt. In practice, this means that if the business defaults on a loan the director’s home, car and anything in their personal bank account could be called on to settle the outstanding debt. You could even find yourself facing bankruptcy if your personal assets don’t cover the debt. This obviously has much longer term ramifications, including prohibiting you from being a company director in the future.
If you co-own your home, with a spouse or partner – they will also have to sign the guarantee. A minority stake holding in the business won’t protect you either as a lender will go after whoever has the most chance of settling the debt.
Personal Guarantees can apply to a wide range of loan facilities including those available from P2P lending platforms – in fact at Purbeck we see most of the demand for Personal Guarantee Insurance coming from the alternative finance market.
The Personal Guarantee Dilemma
Signing a Personal Guarantee to secure access to funding is a risk some small business owners are willing to take while others see it as a step too far. In our survey, 45 per cent of SME owners said they had decided against a loan because it required a Personal Guarantee. However, 64 per cent said they would be more likely to sign a personal guarantee if there was insurance in place to protect against the risk of providing it.
Property Personal Guarantee Insurance can be utilised as part of the range of insurances property developers can now access to help limit their personal exposure and is available for all kinds of development projects including residential, commercial or mix use. It is typically an option for development with Gross Development Loan to Value (GDLTV) of 70 per cent or less and total funding requirements of less than £2,500,000.
Other ways to mitigate the risks
Before deciding that signing a Personal Guarantee is right or wrong for you, it is always important to get some independent advice. Your accountant, solicitor, commercial broker or financial adviser can all help you work out the best options for your business and advise on the additional ways you can cut the personal risks you might face by signing a personal guarantee.
For example, if you run your business with co-directors, come to an agreement to share the guarantee. You can also negotiate a time limit for the guarantee and a cap on the amount, but do remember interest and costs added to the debt can soon mount up.
You may also be able to agree terms where you are guaranteeing a part of rather than the whole loan and that settlement is sought first from company’s assets before enforcing the guarantee.
Don’t let a Personal Guarantee be a barrier
Whether your property business needs funding to start, sustain or grow, a Personal Guarantee shouldn’t stand in the way of the finance you need. Seek expert advice and look at the ways you can mitigate the risk, before signing on the dotted line.