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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.

April 2022: Following a report in the Financial Times this week suggesting that(i) a permanent replacement for the loan schemes offered to small and medium sized businesses during the pandemic is in the pipeline, we have welcomed the move but urge caution over personal guarantee requirements which could prove a barrier to take up.

As a business owner, you’ve got to be comfortable with an element of risk. Not only are you risking your own money, but if you take out credit, you’re risking somebody else’s too.

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.