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"Personal Guarantees" : A Poison To Enterprise

bactrian

Well-known member
Joined
May 11, 2004
Messages
1,238
I know a businessman . He was in business before the Boom , he traded through the Boom and he survived the crash. Even at the height of the Boom he refused ,ever, to give a "Personal Guarantee" when his company borrowed money. That refusal limited his capacity to borrow money. He could have quadrupled , perhaps multiplied by ten, his borrowings ,if he had been willing to give a "Personal Guarantee" . Without a "Personal Guarantee" his bank always subjected his proposals to rigorous risk assessment. During the Boom his "risks" were good and paid off.

Then the Crash came and some "risks" , ventured on in Boom times failed. Debts due to him for work done went unpaid, new work dried up. His business contracted.

A lot of his workers became redundant : He paid all redundancy payments.
His suppliers were owed money : He paid(with difficulty) all his suppliers,
His sub-contractors were owed money: He paid(with difficulty) all his sub-contractors.

He paid his debts.

He took a huge hit , he struggled through the Crash, he survived until the economy seems to be picking up .

The best analogy I can come up with to describe his business status during the Crash is "in hibernation".

Now that the economy is picking up he wants to take his business out of "hibernation " and into "Wake-Up Mode".


In order to go into "Wake-Up Mode" he needs modest borrowings , but the banks are insisting on a "Personal Guarantee". They are inflexible on this .

How Valuable is a "Personal Guarantee", how much security does it provide?

I would argue that at the level of the small business ,it stifles growth and possibly even strangles business , and at the large business level the "Personal Guarantee" not only is useless but is a danger to the bank.


danger to the bank

If we look at Boom time developers, Dunne,Carroll , McFeely.......etc.

They each had versions of

Company A Ltd to develop Project A with borrowings backed by "Personal Guarantee"
Company B Ltd to develop Project B with borrowings backed by "Personal Guarantee"
Company C Ltd to develop Project C with borrowings backed by "Personal Guarantee"
Company D Ltd to develop Project D with borrowings backed by "Personal Guarantee"
Company E Ltd to develop Project E with borrowings backed by "Personal Guarantee"
Company F Ltd to develop Project F with borrowings backed by "Personal Guarantee"

etc.

The unifying factor for all these ventures was "Personal Guarantee" and as they progressed from A to B to C ... etc the notional worth of their "Personal Guarantee " rose and their capacity to borrow grew. Banks did not look at the Project or its capacity to make a profit, "risk assessment " was abandoned in favour of "Personal Guarantee" . The mantra became "He is worth €X millions we are covered"

BUT


He was only worth "worth €X millions" because the bank was willing to loan him €X millions based on a "Personal Guarantee". The value of the "Personal Guarantee" was based on the €X millions of loans already made .

It is also true that when the banks stopped looking at risk they also stopped looking at "Value". It almost became a competition to buy the most expensive site. The banks played along, big site prices, big loans to developers, big house prices , big mortgages to house buyers . There was a huge disregard to anyones capacity to repay, indeed the policy seems to have been that “repayment” would occur out of even larger borrowings.

The crash came and the “Big Borrowers ” could not repay, the billions they owed became the burden of the taxpayer. Their “Personal Guarantees became worthless”. The banks lost billions and we , the taxpayers picked up the bill.

Now that there is some upturn in the market ,small business want to expand, provide jobs, move into exports etc they need borrowings . The banks will give modest loans only if the businessperson is willing to put everything on the line. If the business fails the bank want to be in a position to ruin the borrower.

Most people when they go into business are advised to form a Company. The theory is that this is a “Limited Liability” company and they can risk much but not all. The banks are now making the concept of “Limited Liability” a nonsense. With a “Personal Guarantee ” there is no “Limit” .

if you met a gambler who was willing to bet everything he/she owns and the future of his/her family for a modest return , you would call them fools and irresponsibles, yet this is exactly what the banks require of small businesses.

Most small businesses are unwilling to take that risk, they stay small ,they fail to create more jobs .

Many businesses are never started because the risk asked is too great.

“Personal Guarantees ” are stifling enterprise in Ireland.
 


Lumpy Talbot

Well-known member
Joined
Jun 30, 2015
Messages
26,669
Twitter
No
At Anglo Irish Bank there was a system of providing 'non-recourse' loans unbeknown to the shareholders in that bank.

This would appear to have been a deliberate lowering of customary protections around loans provided with shareholders' money. There is also a suspicion that similar 'non-recourse' loans were being provided to PEPs ('politically exposed persons).

'Non recourse loans' in these instances means where the bank would have no call on the defaulter's assets if the loans turned out to be non-performing.

I haven't seen these issues addressed in an Irish courtroom yet against Anglo officers who were in fact failing in their duty of care in terms of governance and protection of shareholders' interests.

I'm not surprised the banks are well wary of providing loans that cannot be chased up based on a personal guarantee.

It is entirely likely that shareholders could take a civil case against directors of banks for failing to follow appropriate loan governance and I suspect this is what is behind banks tightening up in this area.

I'd be amazed if Anglo shareholders don't pursue the 'off the books' nature of non-recourse loans at Anglo as every time a loan is given out with no guarantees in the event of a default the risks increase to shareholders.

I'm aware of a case recently where a reorganisation of multiple loans into one loan by an Irish bank was held up as the bank concerned started insisting on personal guarantees from the business owners involved and their wives with the implication being that if the loan was defaulted on then the wives would have guaranteed their share of equity in the family homes as well.

As it happened the wives concerned told the bank concerned to f*ck right off, that they weren't signing anything of the sort over their equity in family homes. The bank concerned backed down and the loan went ahead with personal guarantees only from the businessmen involved.
 

bactrian

Well-known member
Joined
May 11, 2004
Messages
1,238
At Anglo Irish Bank there was a system of providing 'non-recourse' loans unbeknown to the shareholders in that bank.

This would appear to have been a deliberate lowering of customary protections around loans provided with shareholders' money. There is also a suspicion that similar 'non-recourse' loans were being provided to PEPs ('politically exposed persons).

'Non recourse loans' in these instances means where the bank would have no call on the defaulter's assets if the loans turned out to be non-performing.

I haven't seen these issues addressed in an Irish courtroom yet against Anglo officers who were in fact failing in their duty of care in terms of governance and protection of shareholders' interests.

I'm not surprised the banks are well wary of providing loans that cannot be chased up based on a personal guarantee.

It is entirely likely that shareholders could take a civil case against directors of banks for failing to follow appropriate loan governance and I suspect this is what is behind banks tightening up in this area.

I'd be amazed if Anglo shareholders don't pursue the 'off the books' nature of non-recourse loans at Anglo as every time a loan is given out with no guarantees in the event of a default the risks increase to shareholders.

I'm aware of a case recently where a reorganisation of multiple loans into one loan by an Irish bank was held up as the bank concerned started insisting on personal guarantees from the business owners involved and their wives with the implication being that if the loan was defaulted on then the wives would have guaranteed their share of equity in the family homes as well.

As it happened the wives concerned told the bank concerned to f*ck right off, that they weren't signing anything of the sort over their equity in family homes. The bank concerned backed down and the loan went ahead with personal guarantees only from the businessmen involved.
I haven't seen these issues addressed in an Irish courtroom yet against Anglo officers who were in fact failing in their duty of care in terms of governance and protection of shareholders' interests.

I'm not surprised the banks are well wary of providing loans that cannot be chased up based on a personal guarantee.

It is entirely likely that shareholders could take a civil case against directors of banks for failing to follow appropriate loan governance and I suspect this is what is behind banks tightening up in this area.



As far as I am aware the systematic demand for "Personal Guarantees" for all borrowings of small companies (Not Plc) exists nowhere but in Ireland. It is anti-business it is anti-enterprise.

Banks should be cautious in their lending , they should only allow low-risk borrowings, but , our Irish Banks, only in Ireland, are demanding no-risk lending. They charge interest rates well above international norms . Nowhere else can Irish Banks, operating in other EC countries get away with demanding "Personal Guarantees" on all small business borrowing.


Irish Banks are abusing their monopoly position!
 

gleeful

Well-known member
Joined
Feb 7, 2016
Messages
7,639
Personal guarentees on the debt of limited companies is anti capitalist and should be banned.
 

Lumpy Talbot

Well-known member
Joined
Jun 30, 2015
Messages
26,669
Twitter
No
I agree that banks are now looking for no-risk lending which says a lot about their levels of confidence in the economy.

Then again the whole concept of banks and bank lending risk has been turned on its head when in fact risk for them exists only in how much opposition there is to bailing them out with taxpayers cash when their model periodically explodes.
 

wombat

Well-known member
Joined
Jun 16, 2007
Messages
32,688
There was a proposal from Labour during the last govt to setup a state bank to loan money to business, I believe there was German money involved. Surely this would be an option? The whole idea of limited liability is to separate business risk from personal assetts. If the bank wants to refuse a business loan they need to be up front about it, ask Ivan Yates about the consequence of giving personal guarantees
 

Roberto Jordan

Well-known member
Joined
Jun 28, 2012
Messages
2,078
I agree that banks are now looking for no-risk lending which says a lot about their levels of confidence in the economy.

Then again the whole concept of banks and bank lending risk has been turned on its head when in fact risk for them exists only in how much opposition there is to bailing them out with taxpayers cash when their model periodically explodes.
Surely an issue is the percentage of applications and loans made that are tied to property or property focussed enterprise. Alongside its neighbors in the UK , Ireland has a disproportionate percentage of economic activity , and therefore capital, tied to property.
If banks , and our economy, were more balanced than risk would , cumulatively, fall.....
Just like those cave dwelling, anti-business swiss and germans who invest in factories and have had neligible increases in real property prices in the last 30 years...who would want to be like them , right?


Better to have a nation farmers/ shopkeepers teachers/ guards/ tradesmen turned property moguls....
 

irishpatriot

Well-known member
Joined
Jun 12, 2014
Messages
392
I agree that the same banks are still the biggest risk to our livlihoods, nothing has changed.
 

Orbit v2

Well-known member
Joined
Dec 8, 2010
Messages
11,716
Well I don't ever again want to be on the hook for other people's banking debt. So, if personal guarantees, less risk, and slightly reduced economic activity are the price for that, then, I'm happy enough with it.
 

gleeful

Well-known member
Joined
Feb 7, 2016
Messages
7,639
Well I don't ever again want to be on the hook for other people's banking debt. So, if personal guarantees, less risk, and slightly reduced economic activity are the price for that, then, I'm happy enough with it.
Personal guarentees cause more risk taking by banks. It lets the bank sales guy make the loan and get his bonus without a proper evaluation of the real business risks.
 

Orbit v2

Well-known member
Joined
Dec 8, 2010
Messages
11,716
Personal guarentees cause more risk taking by banks. It lets the bank sales guy make the loan and get his bonus without a proper evaluation of the real business risks.
Who has the primary responsibility for evaluating the risk? I think it's the business owner. You seem to think it should be the bank and anyone should be able to walk in off the street with a crazy idea, and it's the banks job to say whether it will work or not. I don't think that's how it should work.
 

farnaby

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Joined
May 15, 2006
Messages
1,967

gleeful

Well-known member
Joined
Feb 7, 2016
Messages
7,639
Who has the primary responsibility for evaluating the risk? I think it's the business owner. You seem to think it should be the bank and anyone should be able to walk in off the street with a crazy idea, and it's the banks job to say whether it will work or not. I don't think that's how it should work.
If the bank is putting its money in it, it sure as hell is the bank's responsibility to evaluate the risk. Right now they dont - they just ask for a personal guarantee and then write themselves a bonus cheque. Then the tax payer covers the losses.

Personal guarantees are worthless for bankrupt business people.
 

SilverSpurs

Well-known member
Joined
Nov 27, 2009
Messages
5,550
I know a businessman . He was in business before the Boom , he traded through the Boom and he survived the crash. Even at the height of the Boom he refused ,ever, to give a "Personal Guarantee" when his company borrowed money. That refusal limited his capacity to borrow money. He could have quadrupled , perhaps multiplied by ten, his borrowings ,if he had been willing to give a "Personal Guarantee" . Without a "Personal Guarantee" his bank always subjected his proposals to rigorous risk assessment. During the Boom his "risks" were good and paid off.

Then the Crash came and some "risks" , ventured on in Boom times failed. Debts due to him for work done went unpaid, new work dried up. His business contracted.

A lot of his workers became redundant : He paid all redundancy payments.
His suppliers were owed money : He paid(with difficulty) all his suppliers,
His sub-contractors were owed money: He paid(with difficulty) all his sub-contractors.

He paid his debts.

He took a huge hit , he struggled through the Crash, he survived until the economy seems to be picking up .

The best analogy I can come up with to describe his business status during the Crash is "in hibernation".

Now that the economy is picking up he wants to take his business out of "hibernation " and into "Wake-Up Mode".


In order to go into "Wake-Up Mode" he needs modest borrowings , but the banks are insisting on a "Personal Guarantee". They are inflexible on this .

How Valuable is a "Personal Guarantee", how much security does it provide?

I would argue that at the level of the small business ,it stifles growth and possibly even strangles business , and at the large business level the "Personal Guarantee" not only is useless but is a danger to the bank.


danger to the bank

If we look at Boom time developers, Dunne,Carroll , McFeely.......etc.

They each had versions of

Company A Ltd to develop Project A with borrowings backed by "Personal Guarantee"
Company B Ltd to develop Project B with borrowings backed by "Personal Guarantee"
Company C Ltd to develop Project C with borrowings backed by "Personal Guarantee"
Company D Ltd to develop Project D with borrowings backed by "Personal Guarantee"
Company E Ltd to develop Project E with borrowings backed by "Personal Guarantee"
Company F Ltd to develop Project F with borrowings backed by "Personal Guarantee"

etc.

The unifying factor for all these ventures was "Personal Guarantee" and as they progressed from A to B to C ... etc the notional worth of their "Personal Guarantee " rose and their capacity to borrow grew. Banks did not look at the Project or its capacity to make a profit, "risk assessment " was abandoned in favour of "Personal Guarantee" . The mantra became "He is worth €X millions we are covered"

BUT


He was only worth "worth €X millions" because the bank was willing to loan him €X millions based on a "Personal Guarantee". The value of the "Personal Guarantee" was based on the €X millions of loans already made .

It is also true that when the banks stopped looking at risk they also stopped looking at "Value". It almost became a competition to buy the most expensive site. The banks played along, big site prices, big loans to developers, big house prices , big mortgages to house buyers . There was a huge disregard to anyones capacity to repay, indeed the policy seems to have been that “repayment” would occur out of even larger borrowings.

The crash came and the “Big Borrowers ” could not repay, the billions they owed became the burden of the taxpayer. Their “Personal Guarantees became worthless”. The banks lost billions and we , the taxpayers picked up the bill.

Now that there is some upturn in the market ,small business want to expand, provide jobs, move into exports etc they need borrowings . The banks will give modest loans only if the businessperson is willing to put everything on the line. If the business fails the bank want to be in a position to ruin the borrower.

Most people when they go into business are advised to form a Company. The theory is that this is a “Limited Liability” company and they can risk much but not all. The banks are now making the concept of “Limited Liability” a nonsense. With a “Personal Guarantee ” there is no “Limit” .

if you met a gambler who was willing to bet everything he/she owns and the future of his/her family for a modest return , you would call them fools and irresponsibles, yet this is exactly what the banks require of small businesses.

Most small businesses are unwilling to take that risk, they stay small ,they fail to create more jobs .

Many businesses are never started because the risk asked is too great.

“Personal Guarantees ” are stifling enterprise in Ireland.
The problem is if that a limited company fails due to market forces and not due to a failure of the directors to perform their duties then the company creditors are stiffed. Hence banks have to risk assess a limited company.
If risk assessment fails then the directors have to agree to be held responsible for the company debt if the company fails due to market forces. Otherwise the loan is refused.

There seems to be a mentality that the banks (and credit unions) are an extension of our income available on demand for any purpose.
 

RodShaft

Well-known member
Joined
Jan 29, 2016
Messages
9,558
I know a businessman . He was in business before the Boom , he traded through the Boom and he survived the crash. Even at the height of the Boom he refused ,ever, to give a "Personal Guarantee" when his company borrowed money. That refusal limited his capacity to borrow money. He could have quadrupled , perhaps multiplied by ten, his borrowings ,if he had been willing to give a "Personal Guarantee" . Without a "Personal Guarantee" his bank always subjected his proposals to rigorous risk assessment. During the Boom his "risks" were good and paid off.

Then the Crash came and some "risks" , ventured on in Boom times failed. Debts due to him for work done went unpaid, new work dried up. His business contracted.

A lot of his workers became redundant : He paid all redundancy payments.
His suppliers were owed money : He paid(with difficulty) all his suppliers,
His sub-contractors were owed money: He paid(with difficulty) all his sub-contractors.

He paid his debts.

He took a huge hit , he struggled through the Crash, he survived until the economy seems to be picking up .

The best analogy I can come up with to describe his business status during the Crash is "in hibernation".

Now that the economy is picking up he wants to take his business out of "hibernation " and into "Wake-Up Mode".


In order to go into "Wake-Up Mode" he needs modest borrowings , but the banks are insisting on a "Personal Guarantee". They are inflexible on this .

How Valuable is a "Personal Guarantee", how much security does it provide?

I would argue that at the level of the small business ,it stifles growth and possibly even strangles business , and at the large business level the "Personal Guarantee" not only is useless but is a danger to the bank.


danger to the bank

If we look at Boom time developers, Dunne,Carroll , McFeely.......etc.

They each had versions of

Company A Ltd to develop Project A with borrowings backed by "Personal Guarantee"
Company B Ltd to develop Project B with borrowings backed by "Personal Guarantee"
Company C Ltd to develop Project C with borrowings backed by "Personal Guarantee"
Company D Ltd to develop Project D with borrowings backed by "Personal Guarantee"
Company E Ltd to develop Project E with borrowings backed by "Personal Guarantee"
Company F Ltd to develop Project F with borrowings backed by "Personal Guarantee"

etc.

The unifying factor for all these ventures was "Personal Guarantee" and as they progressed from A to B to C ... etc the notional worth of their "Personal Guarantee " rose and their capacity to borrow grew. Banks did not look at the Project or its capacity to make a profit, "risk assessment " was abandoned in favour of "Personal Guarantee" . The mantra became "He is worth €X millions we are covered"

BUT


He was only worth "worth €X millions" because the bank was willing to loan him €X millions based on a "Personal Guarantee". The value of the "Personal Guarantee" was based on the €X millions of loans already made .

It is also true that when the banks stopped looking at risk they also stopped looking at "Value". It almost became a competition to buy the most expensive site. The banks played along, big site prices, big loans to developers, big house prices , big mortgages to house buyers . There was a huge disregard to anyones capacity to repay, indeed the policy seems to have been that “repayment” would occur out of even larger borrowings.

The crash came and the “Big Borrowers ” could not repay, the billions they owed became the burden of the taxpayer. Their “Personal Guarantees became worthless”. The banks lost billions and we , the taxpayers picked up the bill.

Now that there is some upturn in the market ,small business want to expand, provide jobs, move into exports etc they need borrowings . The banks will give modest loans only if the businessperson is willing to put everything on the line. If the business fails the bank want to be in a position to ruin the borrower.

Most people when they go into business are advised to form a Company. The theory is that this is a “Limited Liability” company and they can risk much but not all. The banks are now making the concept of “Limited Liability” a nonsense. With a “Personal Guarantee ” there is no “Limit” .

if you met a gambler who was willing to bet everything he/she owns and the future of his/her family for a modest return , you would call them fools and irresponsibles, yet this is exactly what the banks require of small businesses.

Most small businesses are unwilling to take that risk, they stay small ,they fail to create more jobs .

Many businesses are never started because the risk asked is too great.

“Personal Guarantees ” are stifling enterprise in Ireland.
Banks refuse to takes risks. Therefore if your business can't pay them, they want your house.


Banks are potentially the greatest evil in society.
 

chef35

Well-known member
Joined
Oct 20, 2012
Messages
607
The problem is if that a limited company fails due to market forces and not due to a failure of the directors to perform their duties then the company creditors are stiffed. Hence banks have to risk assess a limited company.
If risk assessment fails then the directors have to agree to be held responsible for the company debt if the company fails due to market forces. Otherwise the loan is refused.

There seems to be a mentality that the banks (and credit unions) are an extension of our income available on demand for any purpose.
Banks lend out up to nine times their income from depositors, where is their liability when the economy takes a turn, and why are they bailed out, and offered lenience, instead of the business owners, who drive the economy?
 

NYCKY

Moderator
Joined
Apr 17, 2010
Messages
13,152
Banks are in business to make money and have a duty to their shareholders. Without personal guarantees a lot less lending would be done.

It should be incumbent on the borrower to negotiate a review of the personal guarantee after a certain time period or negotiate a lower rate of interest given that the bank has a greater degree of protection.

Some personal guarantees are worthless if the borrower has high levels of debt against their assets
 

RodShaft

Well-known member
Joined
Jan 29, 2016
Messages
9,558
Banks are in business to make money and have a duty to their shareholders. Without personal guarantees a lot less lending would be done.

It should be incumbent on the borrower to negotiate a review of the personal guarantee after a certain time period or negotiate a lower rate of interest given that the bank has a greater degree of protection.

Some personal guarantees are worthless if the borrower has high levels of debt against their assets
Banks are in business because the governments of the world allow them use a three card trick to lend money they don't have.
 

ergo2

Well-known member
Joined
Oct 4, 2008
Messages
14,297
I note that in the recent publicity about NAMA in Northern Island that at the request of business people there the NI govt had negotiated with NAMA that PGs would be released

any word of that here?
 

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