When making a commercial credit application, in order to inject funds into your business, there’s every chance that you’ll be required to provide a personal guarantee. If you’ve never been through the process before you may be unaware of the implications of doing so and therefore unable to make an informed decision.
By the end of this article, you’ll understand what it means to sign a personal guarantee, why lenders require it and how you can mitigate your risk.
Going off the name alone, a secured business loan can sound like the less risky option when trying to obtain some additional funding for your company. But it is less of a risk for the lender, as they are sanctioned on the condition that the borrower offers business assets as ‘security’.
Typically, the borrowing business will put forward a company asset such as property, land or equipment. This means the loan is ‘secured’ against one or more of these assets, which the lender can take if a business stops making repayments.
Late payment problems have worsened for 27% of UK SMEs[i] according to research conducted by Purbeck Insurance Services, the UK’s only insurance provider to offer Personal Guarantee insurance. 29% are experiencing worsening cashflow problems and 30% of UK SMEs are finding access to finance has become harder in the past twelve months. The findings have been revealed as the UK Government confirms it is proposing new measures to stamp down on late payments to small business.[ii]
- Purbeck Insurance Services, the UK’s only insurance provider to offer Personal Guarantee insurance, has revealed that nearly three quarters of SMEs (74%) would be more likely to take out a loan with a Personal Guarantee if they could insure against the risk of providing it. The most common reasons businesses want to take out a loan are to improve cashflow (28% of respondents) and acquire new equipment (27%).
- 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.
A Personal Guarantee puts your personal assets such as your home and savings on the line to settle a debt if you default on the loan
- The 2019 British Bank Business Report[i] paints a worrying picture of the risks small businesses take to secure finance for their business.
Personal Guarantee insurance can support a solicitor’s duty of care to the directors and owners of SMEs