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Does the cost of Personal Guarantee Insurance outweigh the risk?

Taking out a business loan is no simple matter. There’s a lot of money on the line, which is why it’s important that your assets are properly protected in the event that your business becomes insolvent.

When signing a personal guarantee in support of the business loan, you can choose to protect yourself by purchasing personal guarantee insurance.

As part of this process, you are well within your rights to make enquiries before you commit to a particular insurer’s policy, but how do you check whether an insurance company is safe and reliable?

Our specialists have put together a series of questions that you can ask your potential personal guarantee insurance provider to ensure that they are the safest and most reliable choice.

Following news that UK ministers are poised to launch a new £3bn recovery loan scheme that will require business owners to provide personal guarantees, Todd Davison, MD of Purbeck Personal Guarantee Insurance has cautiously welcomed the move but is urging the Government to ensure SMEs are under no illusions about the risks given the current challenges many businesses are facing.

While company status often offers protection to a business director, there are certain circumstances when directors may be held personally liable.

• • -> Personal Guarantee Backed Loan Applications by Small Builders/Contractors up 58%
  • -> Loans for ‘working capital’ up 78%
  • -> Average loan value falls by £23,000
    
    

• • Applications for Personal Guarantee Insurance to support business funding rose 50.5% Q1 2022 vs Q1 2021
    In March 2022, the number of applications doubled those received in March 2021. 
    • 35% of finance applications with a personal guarantee attached are for ‘Working Capital’
    • Applications for personal guarantee insurance to support funding for ‘Working Capital’ up 88% vs Q1 2021
    • The average loan rises 22%, from £142,718 in Q1 2021 to £174,104 Q1 2022
    • Finance applications for business development up 69%

We all know that in order to make money, you need to spend money, which is why many SME directors choose to take out loans to help their businesses grow, or when starting on a new venture.

Starting a business is one thing but keeping it going often needs extra cash and while there is a good choice of funding options to consider, as a start-up it is unlikely you will have security in the business to offer the lender. This means you may need to sign a personal guarantee.

Loan notes, promissory notes, bill of exchange; whatever you call them, they’re an integral part of modern business and financial management. 

In a sign of the increasing uptake of personal guarantee backed business loans amongst small business owners, and a corresponding need to mitigate the personal financial risks of these loans, we saw policy numbers increase year on year by 143% in October 2021, making it a record month!

The market sectors where business owners and directors have taken Personal Guarantee Insurance over the past month are predominantly construction, wholesale and professional services.

Keir Cox, our Operations Director, said: “Our data suggests businesses are keen to borrow as we get to the other side of the pandemic but may be facing a limited choice of options from lenders, outside of personal guarantee backed loans.  This is even with a strong trading position, as has been the case for the majority of applicants over the past month.

“The increasing demand for personal guarantees from lenders was an issue we foresaw as an outcome of the pandemic but while business owners may have little choice over signing a personal guarantee if they need access to cash, Personal Guarantee Insurance is giving them the confidence to take on a loan without significant risk to their personal assets.”