Does the cost of Personal Guarantee Insurance outweigh the risk?
You want to be optimistic about the future prospects for your business when taking out a large loan – and this is certainly important. But it’s also important to be realistic.
It’s wise to remember that the success of your business hinges on factors out of your control, from the economy and late payment to legislation. So, no matter how sure you think you are that you’ll be able to keep up with the repayments, you can never guarantee that you won’t run into problems.
Lenders cover their risk by getting directors to sign Personal Guarantees, often against the value of their houses. But how are you going to mitigate your risk?
An obvious way of reducing the risk is by bootstrapping – using only existing resources to develop the business. This ensures a certain amount of discipline (after all, you’re spending your own money and not someone else’s) whereby you tend to make more informed and careful decisions.
But without external capital, growth can be slow. With limited funds to work with, you’ll be limited on your visibility, the marketing you can do, and what you can do to serve your customers. It also means you’re going to have to hustle a lot harder, work more hours and manage more roles to make growth happen.
Your business’s inability to grow quickly could result in missed opportunities, competitors gaining an upper hand, and becoming over dependent on a small customer base.
Personal Guarantee Insurance
Personal Guarantee Insurance moderates your risk by incrementally mitigating against potential financial loss. In more frank terms, it can be the difference between keeping or having to give up your home in the event of a claim being made under the guarantee. If your personal assets don’t cover the debt, you could even be made bankrupt.
With those potential personal losses in mind, it’s difficult to imagine any situation in which the cost of taking out Personal Guarantee Insurance outweighs the risk. But, Personal Guarantee Insurance comes at a cost - on top of any loan repayments. For some directors, they might consider that the premiums - although competitively priced and based on their company's individual circumstances - could be better spent elsewhere in the business.
Peace of mind
The decision whether or not to take out Personal Guarantee Insurance ultimately comes down to the price you put on peace of mind.
A decision to sign a personal guarantee is often made alone with no requirement to consult anyone outside of the business, such as a spouse. The consequences can be far reaching. This can place enormous stress upon someone running a business. If your business gets into the difficulty the signing of the personal guarantee may ultimately have a devastating impact upon those closest to you. Often a director’s spouse will not know of the risk or if they are aware, they too may have to live with the prospect of losing their family home or bankruptcy should the business fail. The fear is very real and highly emotional.
Many directors have decided their business should now shoulder some of that risk by purchasing personal guarantee insurance on their behalf. This is the price to buy ‘peace of mind’ and it is your business that should pay it.
Apply online with Purbeck to obtain a Personal Guarantee Insurance quote. We’ll calculate your annual premium based on your circumstances and requirements and provide you with your policy to review prior to purchase
If you’ve already signed a Personal Guarantee, you need not worry. Purbeck offer cover to new and pre-existing agreements.
If you’d like more information on how Personal Guarantee Insurance works or, if you’d like to speak to one of our advisors, please call 0208 004 7250.