Our team has been dealing with Personal Guarantee issues for decades and, over that time, we have experienced a great deal of ebb and flow as to how the banks pursue Personal Guarantees, both as an industry and individually.
In a series of articles we set out some insights as to what the main factors are.
The areas we consider are:
- Economic cycle
- Bank lending criteria and process
- Bank debt collection process
This, the first of 3 articles, focuses on Economic cycle.
This has a multiple impact on the way the banks behave.
Boom: economic good times are accompanied by a demand for funding and a hunger on both banks and trading businesses alike to make the most of the opportunity.
For business owners this can lead them to believe that signing a PG is not an issue because the good times continue to roll.
For banks this leads to less and less attention paid to the process of approving finance and consequently personal guarantee signing is seen as a mere paper exercise.
In a boom time this would always be exacerbated by the same good times roll attitude that business owners might have and certainly with regard to the pre-2008 boom, the shift in focus from old fashioned bank managers to a hard driven sales force impacted greatly on a culture where scant regard would be paid to ensuring personal guarantees are put in place in a proper manner.
Recession: after the 2008 banking crisis you can imagine the upward impact that had on the number of demands made in relation to Personal Guarantees. The difficulty for the banks in this regard is that they do not have the systems and resources to deal with such an avalanche and even if they are well organised, they can at best only react to problems.
So this lead the banks to knee-jerk reactions, frequent changes in policy, use of outsourced debt management organisations and solicitors who quite often themselves are not geared up to the influx or have ineffective processes, system bottle necks as there is a struggle to cope with the workload.
Post-recession: as the banks look forward to an economic upturn they are less focussed on the old debt situation, deciding to cut their losses on old debts (because they are better placed to absorb them) and scaling bank their debt collection operations.
However, this post-recession era has a different taint compared to previously; the regulatory environment, recent case law, guarded confidence in the recovery and lack of business confidence in high street banking is conspiring to reduce their ability to lend and the rising sun of alternative finance such as peer to peer, crowd-funding and invoice finance could lead to a whole different set of dynamics going forward.
Our next article will focus on Bank lending criteria and process
09 September By Mel Loades