- 9th November 2023
- Posted by: DMM
- Category: Personal guarantees
A personal guarantee in development finance is a factor to be considered when looking at loan options. Each lender will have their own policy on personal guarantees, or PGs as they are commonly known, and the type of loan will also influence the likely requirements.
What is a PG?
A PG is a legal commitment from a borrower to repay a loan that has been provided to a business in which they are a beneficial owner. Usually, anyone with a beneficial share of 25% or more in the SPV will be asked to provide a PG.
Lenders will want a PG as security for their loan but they’ll certainly not want to call upon them, indeed this would be a last resort. However, the lender will see a PG as a means to keep a borrower committed and a demonstration of their belief in its success.
What Level of PG will you have to give?
Many of the lenders with the most competitive terms will ask each borrower to provide a PG and at 100% (sometimes 200%) of the loan amount. However, probably the most common approach by lenders is to ask for a PG to cover a percentage of the loan amount (usually 15% – 40%).
There are also some lenders that will not ask for a PG at all but this will usually be at the cost of much higher lending rates. There are not many of these lenders, but they are out there and can be very useful for borrowers without assets to support a PG. Finally, where a loan to value (LTV) falls below a certain threshold, usually below 50%, then you may not be asked to provide a PG.
Does a PG have to be Asset Backed?
As above, the answer to this varies from lender to lender but most lenders will want to ensure your net worth position matches or exceeds the PG percentage they ask for. Accordingly, it is important that we provide an up-to-date Assets and Liability statement with your loan application.
It’s important for the borrowers to provide their A&L statements up front as otherwise it can lead to a situation where terms are sourced but are retracted by the lender because the clients net worth position doesn’t support their PG requirements. There are some lenders out there who will require a PG to be signed but do not need the PG to be backed by assets. These lenders are ideal for newer developers or those without an existing property portfolio.
Personal guarantees in development finance are a fact of life and it is good to have a strategy at the outset of any application for a loan.
Will My Equity Investor Have to Provide a PG?
There are various possible scenarios as to how a lender will treat a third-party investor who is putting cash into your development project. For example, the following are scenarios with an equity investor and personal guarantees in development finance;
If most or all of the equity being provided into a project is coming from an investor then there is a likelihood that a lender will want them to be part of the SPV. Therefore, the investor may have to provide a PG along with the other partners in the SPV. An equity investor may also be asked to provide a PG when the other partners in the SPV do not have sufficient assets to support the PG in their own right.
As noted above, there are lenders that do not insist upon a PG and so an investor can simply put in the cash without having to provide further security. In this case, the investor can take a second charge for their own security. Note that lenders that do not ask for a PG will typically be charging much higher interest rates.
Finally, equity from the investor may be paid to the borrower via a loan, perhaps into another SPV in the group. In this case, the investor will not be seen as part of the subject project by the lender and can simply sit in the background. It would also mean that the investor will not be able to place a second charge on the property as this will highlight their involvement. This often happens when a family or friend is providing cash for a project. However, this can be a risky strategy as lenders will usually do their due diligence into where monies come from and may not be keen on this structure. A background loan may quickly become apparent and lender terms changed or withdrawn.