Personal Guarantee insurance can support a solicitor’s duty of care to the directors and owners of SMEs
Solicitors advising the directors and owners of SMEs on finance arrangements for their business, could be failing in their duty of care to their clients if they do not make them aware of the availability of personal guarantee insurance. The warning comes as new research by Purbeck Insurance Services, the UK’s only insurance provider to offer personal guarantee insurance has found 1 in 5 SMEs[i] with a turnover of £50-99m has turned to their solicitor for advice on business finance. In addition, 85% of the 500 SMEs surveyed said that if they were to approach their solicitor in the future in respect of business finance, they would expect to be informed about the availability of Personal Guarantee insurance.
Personal Guarantee Insurance is currently a little known product primarily sold direct to SMEs or introduced by finance brokers. 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.
The British Business Bank Small Business Finance Markets Report[ii] 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. This is supported by Purbeck’s own survey which found 38% of SMEs are planning for growth.
Todd Davison, Director at Purbeck Insurance Services said: “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. [iii]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.
“Some finance brokers are now suggesting small businesses take out this insurance to protect the Director guarantor personally. 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.”
Personal Guarantee Insurance offers protection against the risk that the Guarantee is called by a lender and will offset any outstanding obligations called in under a Personal Guarantee. The level of cover is based on a fixed percentage of the Personal Guarantee the company director wishes to insure and this is dependent on whether the corresponding finance facility is secured or unsecured.
[i] [i] 500 SMEs surveyed by Censuswide, March 2019