Credit crunch gets personal for directors of family firms

Credit crunch gets personal for directors of family firms

Insolvency practitioners warned yesterday that banks were forcing entrepreneurs and family-run firms to take second mortgages on their homes and offer personal guarantees before agreeing to provide business loans.

Many banks also charged penal rates of interest or refused to extend loans to small businesses unless they agreed to offer their personal assets as security, and in particular their main home.

Nick Hood, a spokesman for the corporate rescue firm Begbies Traynor, said: "We are getting busier, and the banks are telling us they have an increasing number of businesses in intensive care ... This is not a good time for any business to fall out with their bank manager."

Mark West, of chartered accountants Berley, said firms were rushing to their banks for unsecured loans only to find strict conditions applied. "The credit squeeze has given lenders the opportunity to compel SMEs and specifically the directors to provide personal guarantees to secure the corporate borrowings of their business, clearly at a time they need the most help," he said.

Business insolvencies have remained steady over the past two years despite a huge rise in personal insolvencies. But insolvency practitioners said they expected a steep rise in the number of corporate victims over the coming months as businesses run out of cash.

Unsecured loans are preferred by small businesses because they shift the risk of failure to the lender. Increasingly, directors are.....continued below

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being asked to offer their homes as security before taking out fresh loans, which could result in them being left homeless if their business goes bust.

Recent research by the Small Business Research Trust, funded by the Forum of Private Business, showed that smaller firms faced rising costs of borrowing.

During the first quarter of 2008, it found that three quarters with both overdrafts and loans reported an increase in lending rates over the past six months, with three in every five respondents indicating that they had a "negative" or "very negative" impact on investment.

· This article was amended on Friday April 4 2008. We misspelled the name of London-based chartered accountants Berley, as Burley, in the article above. This has been corrected.

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