In recent years, many banks in the UK have offered increasing support to British businesses through access to finance. However, many SME owners are rightly concerned about the prospect of using personal guarantees when securing access to funding.
Taking a different viewpoint on the matter, Purbeck Insurance Services has suggested that small business owners should not be deterred by personal guarantees, and instead should seek out ways they could dampen the risk.
In a survey carried out earlier this year on 500 small business owners and directors, Purbeck found that while a staggering 49% had never taken out any business finance, 29% of respondents had typically called on their bank overdraft to fund their business.
What types of business finance have you ever taken out?
| I have never taken out any business finance | 49.00% |
| Overdraft | 29.00% |
| Unsecured business loan | 16.00% |
| Commercial mortgage | 10.40% |
| Asset finance | 9.00% |
| Invoice finance/factoring | 7.60% |
| Other loan secured by debenture or charge | 5.20% |
Furthermore, a significant 12% of small business owners claimed to have decided against using business loans to fund their organisations as they included a personal guarantee.
Todd Davison, director of Purbeck Insurance Services, explained: “Our findings suggest that many small business owners could be looking at external finance for the first time in readiness for Brexit. It’s important they seek independent advice and consider Personal Guarantee backed finance as part of their options as they can seriously reduce the risk of these types of loans.
“As well as taking Personal Guarantee Insurance, they can also share a Personal Guarantee with fellow directors of the business, and negotiate which part of the loan is covered.”
The company’s personal guarantee insurance is an annual insurance policy that provides SME directors with insurance in the event their business lender calls in the personal guarantee, provided by the directors as part of raising business finance.
In an effort to help mitigate risk for small business owners considering opting for a business loan including a personal guarantee, Purbeck offered several tips including:
Negotiate a time limit for the Guarantee and a cap on the amount;
Educate yourself about the risks, whether you can afford to take them and always seek legal support;
Consider splitting the Guarantee between directors;
Know where your responsibilities for the Guarantee begin and end – is it loan specific or does it cover all future loans that the lender may provide?
Remember that if you have signed a Personal Guarantee for another business loan they are cumulative;
Agree terms so that the lender seeks settlement from company’s assets before enforcing the Guarantee
Confirm all points of agreement intention and expectation in writing with the lender.
Consider Personal Guarantee insurance to protect against the risk that the Guarantee is called by a lender. This will offset any outstanding obligations called in under a Personal Guarantee.
