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Is Personal Guarantee Insurance expensive?

Posted by Rory Tebbutt on Oct 17, 2018 1:08:50 PM

We are currently the only underwriters of Personal Guarantee Insurance in the UK. Several others have made interesting noises about entering the market but with current levels of uncertainty over Brexit they have so far been reluctant to dip their toe in the water.

Being the only insurer in the market makes for a greater sense of responsibility. For many company Directors this may be the first time they have been asked to provide a personal guarantee and they are reluctant to commit without insurance. For those that are married this may be the first time their spouse has had to obtain independent legal advice.  As you can imagine, the knowledge that all of their personal assets are being exposed upon a single signature can also reduce their desire to commit to the finance they need to grow.

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As a consequence, we look long and hard at all our applications and try and offer cover where we possibly can. Not unusual for the insurance industry but for us the cover element is only part of the story. From the time a policy is live we advise the Directors on any issues that arise. Issues like bad debt, cash flow, regulatory issues, HR problems, re-financing are all issues we face every day.

For many we act as a trusted advisor, but the reality is we have a real vested interest in providing exactly the right advice to avoid greater problems for the Directors involved. For many Directors the knowledge that they can call on our advice without charge is particularly important if cash flow issues are apparent. Many policyholders call us for a monthly update and we quickly become part of their greater decision-making process on a wide variety of subjects.

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We have an increasing number of cases where we have genuinely helped save businesses from disaster, but it would be unfair to publicly share their stories.

Instead I’d like to focus on one that got away:

On 14th August 2018, a Director of an independent learning provider ("ILPCo") applied for personal guarantee insurance for a new working capital loan of £200,000, raised via the peer-to-peer market and had personal guarantee implications for the Directors. In this case the loan was only secured by a personal guarantee from all Directors and an existing debenture was in place with a high street lender.

Despite the relatively low value of accumulated profits and solvency position we offered terms costing £571.00 pcm.

On 3rd September one of the Directors of the company said that he thought the premium was too high. On the face of it I had some sympathy with his view and explained that the premium reflected an element of financial distress shown in a negative working capital on the back of a £160,000 loss in the prior trading year. There is no ‘hard sell’ element to our business, we provide quotes, answer questions and await a purchase, or not.

In this case we didn’t hear from then again and last week we were advised that the business had appointed Liquidators.

In theory the personal guarantee will now be called in by the funder, fees and interest will attach and the settlement figure will rise to include both and may easily reach £240,000 if the net advance was £200,000.

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Assuming that the personal guarantees are joint and several produces an instant problem for all of the Directors. Disproportionate personal assets are likely to see the lender pursue the deepest pockets and, in the event that those personal assets have been over-committed or overstated, could easily result in a personal bankruptcy. 

Bankruptcy effects the whole family but means that for a period of time a bankrupt is unable to be a Director, hold a management position, enter into a credit agreement and a range of other restrictions. 

In fairness, ILPCo didn’t become policyholders, they didn’t receive any advice from us and we may not have been able to save them from the disaster that has already occurred and will get worse.

Be honest, does £571.00 pcm sound too expensive now, compared to how damaging the real effects of having their personal guarantees called upon and will be?

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Topics: #personalguarantee, #Directors, #SMEs

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