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Legal & Finance: Using your home as a guarantee is a risk.

Byline: John Duckers

A stark warning has been issued to business owners who have guaranteed a business bank overdraft or loan against the family home or other assets.

The warning comes after a recent High Court ruling which has made it more difficult for banks to retrieve money from the business and who instead, are likely to call in the guarantee.

'The majority of small and medium sized business that need cash turn to their bank and many business owners have agreed to guarantee the loan, often against their main asset, their family home,' said Alan Gardner, corporate finance director at the Birmingham office of Haines Watts.

'There seems to be no difficulty in that until things go wrong - and this recent High Court ruling has potentially exacerbated any problem.'

Mr Gardner said that, in the past, the main security for bank loans, such as overdrafts, had been the book debt of the company. Banks retrieved those funds speedily providing guarantors with some security.

Now, as a result of the High Court ruling, banks can only retrieve money from book debt after the demands of employees and liquidators have been satisfied.

'Almost certainly banks will be left short and so their first line of defence will be to call on the guarantor - and where that guarantee involves the family home, there are some very real risks,' said Mr Gardner.

'We are now recommending any client that has guaranteed a loan against his or her house to review the status of that loan and see if it might be possible to obtain some other form of guarantee or alternatively, some other loan mechanism.'

In particular, Haines Watts is advising companies to consider debt factoring or invoice discounting facilities - rather than overdrafts.

In these instances, the bank, or a specialist division, buys and owns the debt which it collects from the ultimate customer. It normally pays for this by funding between 75 and 80 per cent on purchase and the balance when ultimately collected.

'In this way, in the event of insolvency, the debtors are an asset of the bank or finance house, and not the company.

'They are therefore less likely to fall back on personal guarantees,' said Mr Gardner.

'We actively discourage personal guarantees but if essential, advise most strongly that they are limited to realistic values.

'This might be the sort of amount that could be comfortably recovered for the bank from the debtors, or the fixed charge over plant, or security over stock - provided the directors give some assistance to the liquidators in the realisation.' Haines Watts is also recommending use of the Small Firms Loans Guarantee Scheme in conjunction with invoice discounting and factoring where the shareholders have few other assets.

Mr Gardner has also warned the business owner's spouse to be on the look out.

'Having a home as a guarantee for a business loan also poses enormous risks for wives or partners. It is entirely feasible they do not know how the business is performing nor indeed, the exposure that they face,' said Mr Gardner.

'If the company goes bump, it's more than the business they could lose.'
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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:Aug 27, 2004
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