One in three SME loans guaranteed by owners
Published 08/05/2015 | 02:30
One in three new business loans still involves a personal guarantee, according to the first research from the Central Bank on the issue.
Personal guarantees, where company owners commit to repay their business's loans even if the company cannot, remain common here, the new data shows. That is despite the feature being seen by some as a contributor to reckless boom-era lending.
For banks, the use of guarantees can act as a deterrent against default, and helps boost recovery for banks when defaults do happen, according to Central Bank research published in a "economic letter" by researchers James Carroll, Fergal McCann and Conor O'Toole.
For borrowers, the widespread use of personal guarantees by banks can help secure loans but adds a "layer of risk" to business debts with welfare implications for families beyond the business, the report said.
While use of personal guarantees has been controversial in recent years, the report authors make no findings one way or another on whether the guarantees damage the economy, are unusually common in Ireland or what role if any the feature played in inflating the business and property credit bub.
Almost a third (32.99pc) of new small and medium enterprise (SME) loans in 2012 to 2014 were linked to a personal guarantee, according to the research.
By sector, personal guarantees are most common in the construction sector (37.3pc) and least common in manufacturing (30.65pc).
Across sectors guarantees are more likely for smaller and riskier firms, they said, with the likelihood a guarantee had been signed falling when the number of employees, age of the business and profits are higher.
Banks are also found to request a guarantee when a loan is larger.
Use of personal guarantees are found to be higher in loans where land or other security is also posted as collateral, according to the Central Bank research, based on a survey of borrowers by RedC.
Companies with fewer than 50 employees are most likely to have personal guarantees backing their debts, but more than one in five firms with between 50 and 250 staff have guarantees.
Across all sectors the bigger the business the less likely that owners or directors are on the hook for its debts.
Just one in 10 companies with a turnover greater than €20m had its new debts guaranteed, compared to 43.6pc of businesses with turnover between €500,000 to €1m.
It is not clear from the research whether big business are better able to resist banks' requests for guarantees or are simply regarded as less risky by lenders.
Overall, the use of personal guarantees was seen to decline between March 2013 and March 2014 though about one in three new loans were affected, according to the research.