June 2021: The personal financial risk of becoming a personal guarantor for a business loan has become a fact of life for 1 in 3 small business owners but it’s also a secret for 1 in 5. This is according to a new survey of 1000 SME business owners and directors[i] by Purbeck Personal Guarantee Insurance, provider of the UK’s only Personal Guarantee Insurance.
Based on the survey, 34% of small business owners had to make the difficult choice to become a personal guarantor for a business loan in 2020. This means that if the business defaults on the loan, the lender is able to seek settlement of the debt from the director’s personal assets. For some, it’s a risk too far - 45% said they had decided against a loan because it required a Personal Guarantee. However, 66% said they would be more likely to sign a personal guarantee if there was insurance in place to protect against the risk of providing it.
Amongst the survey respondents, 24% took the loan outside of the Government’s support schemes, putting their home and life savings at risk if their business fails. A further 10% agreed to sign a Personal Guarantee to access funding as part of the CBILS with the average debt for which the director would be liable if their business fails, estimated as £154,000[ii] .
Worryingly 22% of those with a partner or spouse has not informed them of the risk to their personal assets, should the business fail.
Top 10 Sectors where the business owner signed a personal guarantee for a loan in 2020 outside of the Government support schemes
- 1. Finance and Accounting
- 2. IT & telecoms
- 3. Retail - High street
- 4. Construction
- 5. Retail - Online
- 6. Manufacturing
- 7. Medical & health services
- 8. Hospitality and leisure
- 9. Legal
- 10. Media/marketing/advertising/PR & sales
Source: Purbeck Personal Guarantee Insurance Survey of 1000 SME Owners and Directors
Top 10 sectors where the business owner signed a personal guarantee for a CBILS loan of £250,000 or more in 2020
- 1. Finance and Accounting
- 2. IT & telecoms
- 3. Hospitality and leisure
- 4. Retail - Online
- 5. Construction
- 6. Manufacturing
- 7. Medical & health services
- 8. Legal
- 9. Media/ marketing/ advertising/PR & sales
- 10. Education
Source: Purbeck Personal Guarantee Insurance Survey of 1000 SME Owners and Directors
Prior to 2020, 21% of the business owners surveyed were already acting as a Personal Guarantor for a business loan. Furthermore, 8% anticipate they will become a Personal Guarantor for a loan in 2021.
Todd Davison, MD for Purbeck Personal Guarantee Insurance said: “Signing a Personal Guarantee is a huge step for any business owner and it is easy to understand why some may feel reluctant to share this decision with their partner or spouse given the risk it can pose to the family home and other personal assets. If a Personal Guarantee puts joint assets at risk – it should really be a joint decision in a relationship.
“Business owners need to understand that there are ways they can mitigate the risks of Personal Guarantees, including through insurance. Finance professionals have a role to play here - 88% of the proprietors of small businesses that we surveyed said lenders and financial advisers have a duty to make business owners aware of Personal Guarantee Insurance. Knowing there is a way to protect their personal assets could give many small business owners the confidence to become a personal guarantor for a business loan – it might also make the news a great deal easier to share with their partner.”
[i] Survey commissioned by Purbeck, April 2021, conducted by Cision. 1000 Directors and Owners running businesses employing 250 people and under.
[ii] Calculated based on the number of loan facilities – 1981 plus 356 linked to personal properties. £1,534,065,370 in PG backed CBILS, £579,924,349 in Personal Property backed CBILS. Recovery of loans under the personal guarantee is capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied through insolvency. Of the remaining outstanding amounts, 80% is recovered through the Government guarantee and 20% of the loss is absorbed by the lender.
