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Mind the gap in protection for SME finance

Posted by Todd Davison on Aug 14, 2019 10:30:00 AM
  • The British Business Bank Small Business Finance Markets Report[i] recently highlighted that while Solicitors rank second to Accountants when SMEs seek advice on new finance, the likelihood of SMEs seeking external advice has grown year on year – the study found that 47% are very likely to pay for independent advice to help them obtain finance. The report also identified a small but significant jump in the percentage of SMEs aiming to grow substantially in 2019.  While many business want to focus efforts on debt recovery to aid cashflow, the proportion of SMEs seeking external finance has remained stable with an uplift amongst micro businesses. 

  • Stressed businessman looking at arrows drawn on a wall

      • These findings suggest solicitors could be seeing an increase in demand for SME finance based services in 2019.  However, the one fly in the ointment is a potential gap in knowledge around the insurance protection now available to SMEs taking Personal Guarantee backed finance.  [ii]62% of SMEs sought external funding in the past 3 years and 73% of these finance agreements required some kind of security – with a Director backed Personal Guarantee the most common requirement.  

        Personal Guarantee Insurance is currently a little known product sold in the main by finance brokers and direct to SMEs.  However, any solicitor appointed to advise an SME on business finance related services such as the provision of independent legal advice to personal guarantors, needs to make their Client aware of this protection, as a professional duty of care.

        It can cover one or several guarantors for a business loan.

        Up until recently there was very little protection for business owners and directors if a Personal Guarantee backed loan was called in.  Considering company insolvencies in 2018 were the highest since 2014[iii],  the loss of savings and personal assets would have been the grim reality for many business owners in the past year. 

        Some finance brokers are now insisting small business owners should consider taking out this insurance as a condition of negotiating funding.  Awareness of this protection is increasing so Solicitors may wish to familiarise themselves with this product and put themselves in a positon to highlight its existence, thereby helping to ensure they are meeting their duty of care to their clients.

        [i] https://www.british-business-bank.co.uk/research/small-business-finance-markets-report-2019/

        [ii] https://www.british-business-bank.co.uk/research/small-business-finance-markets-report-2019/

        [iii] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/780233/Commentary_domain_update.pdf

Topics: #pgi, #personalguarantee, #personalguaranteeinsurance, #commercial finance, #bankruptcy

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