State guarantee? Risk to business owner remains

It sounds nice, a state guarantee. But beware: the guarantee is there for the bank and not for the business owner. For the business owner the risks do not diminish. The state guarantee makes the glass half full for the bank, but half empty for the business owner .

A bank looking to finance a hospitality entrepreneur not only wants to see an enthusiastic business owner with a good business plan. The bank also wants assurance that interest and principal payments will be made. In the hospitality industry, these securities are not easy to provide, because investments in this industry quickly lose their value. If the business has insufficient collateral to offer, the bank will ask if the business owner can guarantee privately or with its other operations. Another option is a state-guaranteed loan, also called a surety loan. This state-guaranteed loan gives the bank additional security, making it more willing to extend a (higher) loan.

Still privately liable

It sounds like a nice option, such a state guarantee. But there are a few caveats. A state-guaranteed loan does not mean that the risks of taking out the money loan are reduced. A state-guaranteed loan must also be repaid in full. Either to the bank, or to the state. As soon as a business owner cannot meet its obligations, the bank knocks on the state's door asking it to pay the amount of the guarantee to the bank. The state - after paying the bank nicely and neatly - will knock on the door of the hospitality operator asking it to repay to the state the amount the state has just paid to the bank. With most of the big banks, the government has a contract, which states that the bank will try to claim that money for the government from the business owner .

Many business owners are unaware of this risk. We hear from the market that bank employees are misinforming business owners . They tell them that if things go wrong, the state will redeem the debt to the bank and that will be the end of the matter. But according to the contracts between the bank and the state, the bank is obligated to monitor for 5 years whether the hospitality operator can repay the state. If the business owner has financed other operations in that same loan, or if he is privately attached to the loan as a joint and several liable party or as a guarantor, this means that the bank can knock on the door of those other operations or the business owner privately on behalf of the state for 5 years.

Tips on state guarantees

1. Don't be too quick to co-sign in private for a surety loan if you take out that loan in a limited liability company. If you do co-sign privately, limit the private liability to a maximum amount. Do not indiscriminately co-sign privately for the entire loan.
2. Make sure that for that state-guaranteed loan only the hospitality business financed with it (the new or remodeled café, restaurant or hotel) is liable and not the other businesses. Breaking up an operation into multiple limited liability companies does not make much sense if you then issue a joint and several liability for the bank.
3. If a bank wants to provide the loan only with a government guarantee and also demands unlimited joint and several liability from private and/or from other operations, you have to ask yourself whether the financing cannot be provided in another way. Consider a loan from the landlord, a loan from a supplier, a franchise formula, or through crowdfunding.
4. Consider the possibility of finding a partner willing to participate in the new operation. Then money is provided, not as a loan, but as equity, for example against the issue of shares. All sorts of rights can be assigned to shares. For example, you can issue shares with or without voting rights and with or without profit sharing or special rights for special cases. Such a partner can only become a shareholder, but the cooperation can also go further, by actually participating in business. For example, you can also bind a good cook or manager to you by giving them the opportunity to share in any profits. This cuts both ways.
5. Also consider the "worst-case scenario. What is the worst that could happen if everything goes against you. For this, don't just approach your own partner or your own accountant. They are sometimes already fully on board with the beautiful plans and follow completely in the enthusiasm. Ask your accountant, for example, if he has a critical business owner in his network who would be willing to look in, or if he knows a good lawyer with an understanding of contracts, corporate and bankruptcy law and financing and securities. An hour of sparring can take the rose-colored glasses off for a while and save a lot of trouble. In any case, it ensures that you are more aware of possible risks and that a decision is thus better considered. 

What is a state guarantee?

The state-guaranteed loan or surety loan is intended for businesses with up to 250 employees and an annual turnover of up to €50 million, or a balance sheet total of up to €43 million. If you look at the Misset Hospitality Top 100, you can see that many of the hospitality businesses may therefore qualify for a state-guaranteed loan.

With a state guarantee, the rules on the size of the financing, term, repayment and suspension depend on the type of business - whether you are a start-up or an established business owner - and the purpose of the loan. No later than 6 months after loan signing, the first repayment must be made, and the term of the state guarantee is up to 6 years from the first date of repayment. There are several forms of state guarantee:

• Under the regular state guarantee, the government guarantees up to 45 percent of a loan of up to €2.22 million.
• Under the state guarantee for first-time buyers, the government guarantees up to 67 percent of a loan of up to €266,667.
• Under the innovative state guarantee, the government guarantees up to 60 percent of a loan of up to €1.5 million.

How do I get a state-guaranteed loan?

The business owner may ask the bank for a state-guaranteed loan. But usually the bank itself makes this proposal if it sees too little collateral, but has confidence in the business owner and its plan. Such a state-guaranteed loan may often be repaid later and more slowly than a regular loan.

For a state guarantee, the bank owes a one-time guarantee fee to the state. The amount of the commission can be as high as 5.85 percent and depends on the term and size of the loan and the type of state guarantee. The bank usually charges this commission obligation to the business owner This one-time cost is recouped by the business owner because the interest costs on the loan are lower. Thanks to the state guarantee, the bank has more collateral. With the risk, the interest rate decreases. This is how the bank will portray it to the business owner: "You will earn back this one-time commission cost through lower interest costs.