CM December 2020

EXCLUSIVE REPORT
Sean Feast FCICM
PG, which could be extremely strong. The
lender has no visibility of any commercial
credit guarantees that have been made, and
whether the PG has repaid any defaulted
lines.
“If such data were available, the credit
decision may end up being very different,”
Andrew adds. “We have seen multiple
instances of individuals with clean credit
files guaranteeing multiple commercial
credit lines – a practice known as ‘Stacking’.
“In such instances, PGs can guarantee
many lines of credit with multiple credit
providers, with each lender oblivious to
the underlying credit risk. In the event of
default, the PG will see no detriment to their
personal credit file, unless the lender obtains
a Judgment against the individual. In this
latter case, if another lender is chasing a PG
for a guaranteed debt, there is almost no way
a new lender would know this – unless the
defaulted debt lender has secured a county
court judgement against the PG.
“In the event a PG guarantees multiple
credit lines, the risk that the PG will remain
solvent if some of the debts guaranteed fall
into default, is less than certain. Creditors
should be furnished with such information
at the underwriting stage of a new loan.”
ESTABLISHED LENDERS
Andrew says that many established
commercial lenders including Liberis and
Newable Business Loans acknowledge the
problem of PG stacking and the hidden
credit risk that is created.
Varun Goel, Director at Liberis, says the
problem could be easily be resolved if the
CRAs are willing: “Even with all of the due
diligence and risk analysis we do before
agreeing to the provision of finance, we
cannot currently see if a Personal Guarantee
has been used on multiple loan applications,
as we only have visibility of the personal
and commercial credit files. As such, PG
‘Stacking’ remains a risk that is completely
hidden from view.”
Phil Reynolds, Managing Director of
Newable Lending, says PG ‘Stacking’ is
certainly an issue and cites other challenges:
“At the origination stage, it is difficult
to get visibility of a borrower’s full PG
obligations, due both to multiple companyloan
combinations and outstanding balances
versus the total guaranteed (i.e default fees,
early settlement etc).
“Although we do a considerable amount of
director matching at Companies House, this
still relies on the director’s Companies House
profile being correct and often it is not. We
have seen numerous occasions where the
same individual is a director of multiple
companies, but their director profile is
not linked, usually because of something
as simple as a discrepancy in their date of
birth.”
HARD OF HEARING
Andrew is frustrated that approaches to
CRAs have so far produced no substantive
response: “A possible solution is to create
a third CRA database, solely dedicated to
personal guarantees. This database can be
governed by the same ruleset within the
Principles of Reciprocity, only allowing the
reporting of PGs (both live and defaulted),
with access only permitted to those who
contribute to the database. This provides
transparency, fairness and consistency to
commercial lending, whilst minimising the
potential credit risk currently at play.”
“With PGs, the guarantee is
not called upon by the creditor
until the company defaults on
payment. So there isn’t a default
as such by the PG. The company
defaults, and at that point the
creditor can call on the PG for
payment when the company has
failed to pay. In this case liability
for the debt shifts to the PG.”
– Andrew Birkwood, Azzurro Associates.
“Many Banks and Alternative Finance
Providers routinely request PGs,” Andrew
explains. “The call for a bureau to maintain a
PG register would give the lenders access to
the PGs true financial position at the point
of advance, currently signing a PG doesn’t
automatically impact personal credit but it
is a hidden risk to lenders. The awareness
of this hidden risk shouldn’t only become
apparent when a debt defaults and the PG is
called upon to make payments or is sued in
the County Courts.”
Andrew is calling on the CRAs to take
decisive action: “We believe, and are
supported by many lenders in this view,
that new commercial lending depends on
understanding the full credit risk picture.
“By enabling the reporting of PGs, CRAs
will stimulate commercial lending at a
time critical to the health and resurgence
of the UK economy. With Government led
COVID-19 funding sources soon to expire,
now is the time to resolve this issue to allow
the lending community to proactively lend
to businesses with clarity and confidence in
their lending decisions.”
Advancing the credit profession / www.cicm.com / December 2020 / PAGE 23