Banks expect personal guarantees from SMEs
Banks are demanding more personal guarantees from small business owners as security against loans since the global financial crisis, accounting firm Grant Thornton says.
Matt Parkinson, partner at Grant Thornton, said post-global financial crisis (GFC) banks wanted to know businesses had "skin in the game" before they would grant them loans.
Banks wanted to know business owners were invested before making capital available, Parkinson said.
"The more skin, the more comfortable they become."
Banks were also asking for guarantees for overdrafts, he said.
While banks had always asked for personal guarantees, they were now asking for more guarantees and were less flexible around the value and timeframe of the guarantee, he said.
"There is always the option of not signing a personal guarantee, but the flipside is that the banks may decide not to grant the loan."
Parkinson said it was important to remember that, when debt was extinguished, the personal guarantee should be extinguished too so it did not roll over to other areas of the business.
However, the growing importance banks were apparently placing on personal guarantees was not hindering business growth, he said.
Business owners were giving a personal guarantee and taking on the debt so they could keep trading.
Massey University banking expert David Tripe said banks had always required security on small business lending and the number of personal guarantees being sought had not increased since the GFC.
However, it was possible banks were being more stringent with their small business lending guidelines, Tripe said.
Stricter rules surrounding personal guarantees, including the amount banks required, would be a "natural reaction" after the GFC.
Interest rates on small business lending were higher than those for personal lending rates due to the higher risk nature of the loan, Tripe said.
Higher interest rates meant slightly less lending took place but it did not stop most small business owners from being able to get a loan from their bank.
"It's going to make it a little bit more difficult and a little bit more expensive."
BNZ head of small business Harry Ferreira said banks judged each business case by case.
However, they had not increased the number or the amount of personal guarantees sought since the GFC.
Ferreira said the current environment was probably the most advantageous for small businesses in many years.
"We're certainly looking to make it easier for small businesses to access funding. Since the GFC we've really worked to enable businesses to grow."
Ferreira said small business loans were not particularly risky for banks as the debt was usually secured against the business owner's house or another asset.
"It's pretty scary for any small business owner when they secure debt against their house but it would be fair to say that the majority of customers do it."
ANZ retail and business banking managing director Fred Ohlsson said ANZ had lent record amounts to small Kiwi businesses during the past year.
ANZ had not altered the amount or the emphasis placed on personal guarantees when lending to small firms, he said.