Adding Personal Guarantee Insurance to the mix of small business services

Accountants are on the front line when it comes to understanding the financial pressures facing the UK’s small businesses.  Late payment, managing cashflow, the Brexit deadlock are all making business harder for the directors and owners of SMEs and it’s often access to finance that determines a business’s fate, particularly in the early years.  

While lending advice has not traditionally been core to the accountants’ proposition, 26%[i] of the small businesses we surveyed said they had approached their accountant for business finance advice.  Accountants therefore have a strong opportunity right now to extend the services they provide to small businesses.  Knowing as they do, the intimate details of the business’s finances they can guide customers on the right finance options for their needs and more importantly, advise on the ways they can cut the risks associated, particularly where personal guarantees are concerned. 

Small Business Finance Options

The types of finance options open to small businesses range from the traditional bank loan or overdraft through to Peer to Peer lending platforms. 

• Bank Loan / Overdraft – small businesses will need to prove to the lender proof the business will generate the income and cash to repay both the facility according to the terms of the loan, and service the loan by meeting interest payments. Security in the form of business or personal assets is sometimes needed for this type of borrowing.
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• Factoring - Also known as debt factoring, this type of finance works by the business ‘selling’ their invoices to a third party at a discount, who agrees to manage the company’s sales ledger and credit control on an ongoing basis for a fixed period. In return, the factoring company advances some funds upfront when the business client sends an invoice to a customer. This ensures that the business has a regular flow of cash by unlocking funds tied up in unpaid invoices.
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• Using a Credit Card - Business credit cards are a quick and easy way to borrow money. The general principles of using a business credit card are the same as they are for a personal credit card. Because company credit cards are a type of unsecured lending, the criteria are fairly stringent and the limits are strict. As such, when applying for a business credit card, lenders will most likely look at your business credit score, and they may ask for personal guarantees to provide some security.
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• Debt Crowdfunding – This works largely in the same way as the traditional model of applying to a bank for a business loan, the main difference being that the finance is raised via a crowdfunding or peer-to-peer lending website, and the funds are contributed by multiple investors. As part of the agreement, businesses are required to pay the investor(s) their money back with interest – but, crucially, they don’t have to sell any equity. It can be attractive to businesses seeking an alternative source of finance who have been unable to raise funds via banks or credit unions.
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Depending on how much money is borrowed, a small business will typically be required to provide some security, in the form of business assets or a personal guarantee.

What is a Personal Guarantee?

Personal guarantees are a written promise made by a director or number of directors to the lender accepting liability for a company’s debt. The main benefit of using a personal guarantee is it can open options for financing, particularly if a business needs access to finance fast and hasn’t built up adequate assets in the business entity to provide security to the lender.

However, if the business defaults on a loan the director’s home, car and anything in their personal bank account could be used to settle the debt.

Jointly owned assets, such as a home, require the joint owner (for instance a spouse or partner) to sign the guarantee, even if they are not involved in the business in any way.

As well as the risk to personal assets which could be called in to pay back the debt, if the value of the assets aren’t enough to settle the debt, the Guarantor could find themselves facing bankruptcy which has longer term ramifications. 

Worryingly, 39%[ii] of small business owners in our study confessed they were not aware their personal assets such as their home and life savings could be at risk.

Cutting the risk of a personal guarantee

Clearly any accountant advising their small business customers on the matter of finance will make them aware of the risks of signing a personal guarantee but they should also discuss how the risks can be cut significantly through personal guarantee insurance. 

One in ten of the small businesses we spoke to had decided against taking out a business loan because it included a Personal Guarantee but 74% said they would sign a Personal Guarantee if they could insure against the risk of providing it[iii]. 

Demand for Personal Guarantee Insurance on the up

The UK Government has been encouraging lenders to sustain access to finance for small businesses but the reality is that lenders are tightening their lending criteria, increasing the pressure on business owners to put their personal assets on the line in order to access that finance.  As a consequence the demand for personal guarantee insurance is on the up.

In the month the UK was expected to leave the EU, Purbeck saw a 173% year on year increase in demand for personal guarantee insurance, with a record peak that month in new policies underwritten. 

There is not only increasing demand for finance, but business owners are looking for solutions to mitigate the risks of the personal guarantees being demanded.  It really underlines the valuable role accountants can play in introducing personal guarantee insurance to their clients. 

Purbeck Insurance is a specialist Personal Guarantee Insurance underwriter, authorised and regulated by the Financial Conduct Authority. We work alongside lenders and brokers to provide a bespoke insurance solution based on the lender’s individual requirements and risk profile. Please contact one of our specialists today to learn more on 0208 004 7250.

[i] Purbeck commissioned a study of 500 small business owners and directors by Censuswide, 2019.

[ii] Purbeck commissioned a study of 500 small business owners and directors by Censuswide, 2019.

[iii] Purbeck commissioned a study of 500 small business owners and directors by Censuswide, 2019.