Todd Davison, MD of Purbeck Personal Guarantee Insurance
Access to funding is going to make or break many small firms over the next year. While most small firms plan to raise costs and cut energy use based on a recent survey by Purbeck Personal Guarantee Insurance, close to 1 in 3 small business owners (29%) said they are already planning to secure new finance to help manage rising costs. If speed is of the essence and a loan seems the best route, business owners will need to be prepared to sign a personal guarantee. This gives the lender a written promise from the owner/manager that they will settle the debt if their business fails. It’s one of the big dilemmas of running your own business. Sign a personal guarantee and shoulder the burden by putting your home and other personal assets at risk or don’t sign and severely limit your finance options.
Only a third of small business owners know what it means to be a personal guarantor
Aside from the obvious risk of further interest rate increases impacting loan repayments, a big concern highlighted in our survey is that many small business owners could enter into this kind of agreement, without fully understanding the implications – or indeed how to avoid the risk.
We asked 1000 small business owners/managers what it means to be a personal guarantor for a business loan. Across the board, only 33% of business owners answered correctly. Interestingly, the younger the business, the more clued-up respondents appeared to be over personal guarantees.
Of course young businesses aren’t necessarily run by young people and just to prove that point, 18-24 year old business owners/directors in our survey were the least likely to know what it means to be a personal guarantor while 55-64 year olds were most likely to be more informed. Perhaps this is not surprising as young business directors are unlikely to have the assets to offer as security but it does also suggest a worrying lack of financial acumen. It might also explain why 25% of small business owners aged 18-24 year old have considered closing their business in the past year compared to just 11% of small business owners in the 45-54 year old age bracket.
So what’s the worst case scenario?
In essence, if a business owner has signed a personal guarantee for a loan and the business defaults on that loan, the director’s home, car and anything in their personal bank account could be used to settle the outstanding debt. If they co-own their home, with a spouse or partner – they will also have to sign the guarantee. In some cases, the personal assets may not be sufficient to cover the debt which means the business owner could even find themselves facing bankruptcy.
How to cut the personal guarantee risk
In such an uncertain economic environment, few businesses can have 100% confidence about how their business will fare over the next twelve or twenty-four months. Signing a Personal Guarantee is never done with relish but right now that decision is particularly tough. However, it is vital for the sake of the wider economy that small business owners are both aware of the risks and feel confident about making such a personal decision for the sake of their business.
It is for this reason that Personal Guarantee Insurance is becoming such a key ally in small business finance. At Purbeck, we saw a 123% year on year increase in PGI secured in Q3 2022.
Personal Guarantee Insurance means if the business does fail, 80% of the loan will be settled by the insurance rather than the business owner’s home, savings and other personal assets being called on to settle the debt.
The level of cover is based on a fixed percentage of the personal guarantee the company director wishes to insure. This is dependent on whether the corresponding finance facility is secured or unsecured.
Personal Guarantee Insurance also does a lot more than pay out following a claim. Policyholders are offered access to free mentoring and support services if the business gets into financial distress, plus the huge benefit of expert guidance at the point the debt needs to be settled.
We know that 29% of small firms are looking for extra financial support and while 52% are focused on keeping on an even keel, 38% are planning for growth. Signing a Personal Guarantee can widen options and improve access to finance, including the Government’s Recovery Loan Scheme.
Small businesses have the will, and when a loan is needed, personal guarantee insurance can give them the way.
