The Red C survey of SME credit demand for the period April – September 2012 showed that 41% of SMEs which were approved or partially approved for credit were subject to a personal guarantee. This was the second most common condition with the need to provide regular management accounts/debtors & creditors listing to the bank being the most common requirement at 57%. This survey covered over 1,500 SMEs. The Eurostat 2007-10 survey on access to finance asked about the need for guarantees in obtaining loan finance. The results showed Ireland at 39% in 2010, almost exactly at the average figure. The Irish figure had reduced slightly from 40% in 2007, which was slightly above the average then of 38%.
The Central Bank’s Code of Conduct for Business Lending to Small and Medium Enterprises provides that a regulated entity must not impose unreasonable personal guarantee requirements on borrowers. In addition, where a regulated entity seeks collateral or a personal guarantee to support a lending proposition it must explain clearly the possible implications for the guarantor of giving such collateral or personal guarantee. Any enforcement of a personal guarantee over a principal private residence must be in accordance with the Code of Conduct on Mortgage Arrears. A SME is entitled to apply for a review by the Credit Review Office where the borrowers considers that the terms or conditions attached to a credit facility or its price are so onerous as to amount to a constructive refusal. This could include unreasonable personal guarantees. Personal guarantees make the guarantor liable in the event of the SME being unable to meet its liabilities and may make the guarantor personally liable for the debts of a limited company. I would strongly advise SMEs to ensure they have independent expert advice on the possible consequences of giving personal guarantees.