One-in-three SME owners still guarantee business loans

A third of new business loans still involve a personal guarantee from the business owner, according to research from the Central Bank.

The act of personal guarantees, where a business owner commits to repaying their business’s loans even if the company itself cannot, remains a common feature despite being viewed as a contributor to reckless lending during the ‘boom era’.

Banks continue to see guarantees as a deterrent against a defaulting company, providing a safety net for banks should the worst happen, according to the Central Bank report published in an “economic letter” by the study’s researchers, James Carroll, Conor O’Toole and Fergal McCann.

The research shows that 32.99 per cent of new SME loans in 2012 to 2014 were linked to a personal guarantee.

These guarantees are most common in the construction sector (37.3 per cent) and least common in manufacturing (30.65 per cent).

It would seem personal guarantees are more necessary for smaller firms that are perceived as ‘riskier’ by banks, with the likelihood that any guarantee agreed falls when the number of employees, age of the business and its profits are greater.

In fact just one-in-ten larger companies with a turnover greater than €20m had its new debts guaranteed, compared with 43.6 per cent of SMEs with a turnover between €500,000 and €1m.

As yet it is uncertain from the report whether big businesses are simply better equipped to resist banks’ requests for personal guarantees or whether lenders just regard them as a smaller risk.

On the whole, the use of personal guarantees for Irish businesses declined between March 2013 and March 2014.

Date published 11 May 2015 | Last updated 11 May 2015