Jay's journey through the perilous landscape of unregulated loans is a wakeup call for business owners considering this type of loan.

What turned into a daunting debt scenario for Jay could have been avoided, if he had taken advice first. Instead, it became a costly lesson in the importance of recognising the need for, and ultimately reaching out for expert intervention.

Read our article for the insightful details.

Considering an unregulated loan? Read this first

Jay was referred to Anvil Business Advisory by an insolvency firm. He had six personal guarantees amounting to around £250k, including one from an unregulated lender, and insufficient assets to settle them. Jay was also suffering badly with his mental health, due to the collapse of his business, and the ongoing pressure of dealing with his personal guarantee liabilities.

In this situation it is easy to assume that bankruptcy is the only option available, and whilst that option was discussed, Jay had his equitable share in the family home to protect, and wanted to explore a different solution, if it was possible.

Because there was little hope that his creditors would benefit from any dividend in the event of Jay’s bankruptcy, there was an outside chance that with family financial assistance, his creditors might accept an informal proposal in full and final settlement of their debts, whereby they would recover something, and Jay would avoid bankruptcy.

A proposal was put to all the PG’d creditors. It was only then that it came to light that the unregulated creditor had already issued a bankruptcy petition. Jay had not disclosed this to us before, because this among other matters were simply too difficult for him to confront. The unregulated creditor that had issued the bankruptcy petition declined the proposal, and although discussions were held with them, they also refused to withdraw the petition. The proposal had clearly made sense, because all the other creditors had accepted it. However, family support fell away in light of the bankruptcy petition not being withdrawn, and the proposal failed.

Any creditor trying to recover a debt can be unpredictable. Will they be realistic about the prospect of full or partial recovery? Or, will they want their pound of flesh at any cost, and rightly or wrongly pursue the debtor all the way to bankruptcy, when any undisclosed assets will be discovered, if there are any. It’s a risk for the creditor that is more likely to not pay off, but will deliver the dubious satisfaction of knowing the truth.

In our experience, by the time a debtor arrives at that point, they are beyond hiding anything. They have exhausted every formal line of credit available to them, and have already sought and used up any available financial assistance from family and friends. At this point a business owner may decide on a last roll of the dice, and turn to the unregulated lending market.

It would be wrong to lay blame at the unregulated market’s doorstep for situations such as the one Jay found himself in, because they can provide an important and necessary source of lending to borrowers who would be unlikely to have lending agreed by a high street lender. So, it’s important to understand what you are considering getting into first, and the possible consequences.

An unregulated lender is not obliged to carry out the same levels of due diligence that a regulated lender would. In other words, even if your business was clearly in distress like Jay’s, the unregulated lender will take your personal assets into account by way of a personal guarantee when agreeing a loan at a reassuringly high interest rate over a shorter term, where a regulated lender would most probably decline the loan application as had happened to Jay. They are also not obliged to explain the legalities, and urge you to first seek independent legal advice before signing up. They probably won’t even tell you the lending is unregulated. So, the onus is on the borrower to ASK, if you know what to ask.

Again, unregulated lending has its place. It can, in the right circumstances be a lifeline to essential finance that is otherwise unattainable, and be the cash injection that gets the company moving forward again. But, at its worst, unregulated lending has ruthless consequences for those who go into it without fully understanding the ground rules.

In Jay’s case, it was the one unregulated creditor that spoiled the chance of recovery for the other creditors, and precipitated Jay’s bankruptcy. Jay knew his business was in distress and the risk he was taking, but still went ahead. What he hadn’t understood, was that the loan was unregulated, and what the inherent risks were. It is not an unusual story, but it could have been avoided if, instead of going to the unregulated market first, Jay had sought some advice instead.

Jay has now been declared bankrupt, and the family home may have to be sold as part of that process. Sadly, the cruelty of bankruptcy is that it impacts on the debtor’s family, often without benefitting any of the creditors.

In summary, if your business is struggling financially, and you are unable to get funding through a regulated source, then seek some advice first to establish whether your business would benefit from some restructuring, before approaching an unregulated lender. It doesn’t take long to get an opinion, and the unregulated lenders will still be there, ready to “help” you.

Protect your interests and mental health in times of financial crisis with Anvil's expert debt advisory services. Contact us before considering unregulated loans.