Todd Davison, MD of Purbeck Personal Guarantee Insurance offers PG Tips for SME Owners
Following a ‘super complaint’ by the Federation of Small Businesses which argued that the need for personal guarantees has a detrimental effect on access to funding for small businesses, the Financial Conduct Authority (FCA) has now launched an investigation into their use by lenders on loans under £25k, to sole traders and partnerships[i].
Personal guarantees are part and parcel of some loans
Our analysis demonstrates that personal guarantees have become an almost unavoidable part of securing a small business loan. Looking at the whole of 2023 vs 2022, there has been a 67.5% rise in applications from the directors and managers of limited companies for personal guarantee insurance[ii]. These people are using insurance from Purbeck Personal Guarantee Insurance to share some of the risk, improve their confidence to take finance and allow them to pursue growth opportunities.
Becoming a personal guarantor for a business loan is a big decision
We know from a survey we conducted this year that 13%[iii] of smaller firms step back from loans if they discover a personal guarantee is attached. So, it’s great that the FCA is working to encourage better lending practices for business loans to the small businesses within their remit.
Fundamentally though, personal guarantees exist to protect lenders and the risk is that by enforcing stricter regulations on personal guarantees as a whole, those SMEs seeking higher value loans via the alternative lending market, may see potential funds dry up. Ultimately, personal guarantees must be appropriate and proportionate to the loan being offered. At the same time, businesses must seek professional advice and seek ways to limit the risks when faced with a personal guarantee demand:
PG Tips – Mitigating the risk of a personal guarantee
- If a business has a number of co-directors it might make sense to share the guarantee amongst this group.
- Ask the lender if a time limit could be agreed for the guarantee or a cap set on the amount.
- Explore whether the lender would agree to a guarantee on part of the loan, rather than the whole of the loan.
- Ask the lender if part of the debt could be settled with company assets like plant and equipment.
- Consider personal guarantee insurance if the business does fail, 80% of the loan would be settled by the insurance rather than the business owner’s assets being called on to settle the debt.
- Finally, always seek professional advice from a solicitor or accountant when faced with a personal guarantee request.
It will be interesting to see the outcome of the FCA’s investigations. In the meantime, small businesses must consider the ways to help minimise the risk of taking on a personal guarantee, and in doing so keep their finance options open.
[i] https://www.fca.org.uk/news/press-releases/fca-investigate-use-personal-guarantees-certain-small-business-lending
[ii] Research by Purbeck Personal Guarantee Insurance
[iii] Research by Purbeck Personal Guarantee Insurance
