A new decade begins...
The commencement of the prior decade saw us still dealing with consequences of the recession that commenced in 2008. Cast forward ten years and we are still surprised that a double dip did not occur.
Mid-decade, increased reference was made to the significant number of zombie companies (defined as businesses that are unable to cover debt servicing costs from current profits over an extended period) within the UK SME market. Heightened reference to ‘zombies’ reappeared in 2019.
One of the fundamental changes we have seen during the last decade is the exposure directors/shareholders of limited companies have relative to their personal financial security being linked to their company.
Lenders have always sought personal guarantees to be provided by directors/shareholders. However, the extent to which they are provided has risen significantly. Further, there has been increased unsecured lending in the market with the rise to prominence of peer to peer funding.
We are not critics of peer to peer/unsecured lending, but as the lender sits as an unsecured creditor they ordinarily receive no return if the company enters a formal insolvency procedure in the future. The consequence is a call on the guarantor for the full amount outstanding.
We have often found that directors/shareholders secure funding due to the relative ease and speed in which it can be obtained to plug a financial gap, without undertaking forecasts or a sufficient review of their business.
The demise of a company through a formal insolvency process ordinarily now results in a significant impact on a guarantor’s personal financial position. Often, this threatens the solvency of the guarantor themselves.
It is difficult for a business owner to sometimes divorce their understandable passion for their business, which they have lived and breathed, from the reality of previous and forecast performance. However, business failures inevitably happen and, no matter how difficult the decision is to make, it is often the best decision to cease to trade as opposed to an individual exposing their personal financial position to inject funds into a non-viable business.
Prior to taking on any form of lending where a guarantee is required it is imperative to take a step back and sense check business viability.
Do not hesitate to contact us if you require support with preparation of forecasts or in considering your options.
ELS Advisory Limited
3 New Street
01132 623952 (Leeds Office)