Investing in your business through a buy-to-let mortgage can offer substantial rewards, helping you to secure commercial property to expand your operations or gain profit through letting to a third party. However, it’s essential to be informed and prepared for the potential risks.
Topics: buy to let
A personal guarantee is a pretty serious commitment, but it’s not one to shy away from.
For the last three years, UK businesses of all sizes and sectors have experienced significant financial challenges.
Applications for Personal Guarantee Insurance Down 13%
With the UK’s turbulent economic climate, it’s no surprise that businesses, from SMEs to large corporations, are facing financial challenges.
June 2023: Acquisitions that go wrong are a top cause of business insolvency, according to Purbeck Personal Guarantee Insurance, which has analysed claims from business directors for personal guarantee insurance, following insolvency. Not being close to business financials due to an over-reliance on accountants, and bad debts or payment disputes, were also major reasons why business owner’s dreams ended in a nightmare. There is good news, however, as there are solid steps that can be taken to avoid some of the most common reasons businesses fall into insolvency.
Todd Davison, our MD said: “Business failures can often occur after a business acquisition. When a business goes through a leveraged buyout, where the target company to be acquired is loaded with debt to buy out the former shareholders, then this has an adverse cash flow and margin impact to meet the repayment obligations. It means an immediate deterioration of the balance sheet position. So the new owners have to grow the business or deliver substantial cost savings through the business quickly, to avoid failure.”
Firms window dressing their business to make it appear more secure than it actually is prior to acquisition can be common, according to Purbeck Personal Guarantee Insurance. Robust due diligence processes including, arranging a financial audit, scrutinising the validity of future orders and analysing future staff and cost savings that can be made once acquisition has happened, can all help to sidestep insolvency.
Purbeck also advises keeping a close eye on the balance sheet. It found that often a director, who is incredibly skilled at providing a product or service, may rely on their accountant for day to day financial running of their business. Unfortunately though, it is the business owner who ultimately shoulders responsibility for business cash flow, so directors should seek clear explanation from accountants to ensure they are always knowledgeable about their financial situation.
Bad debts or payment disputes were the third most common reason businesses fell into insolvency. Businesses looking to protect themselves from bad debt will always research potential clients thoroughly before selling goods and services to them. According to Purbeck, however, a common theme amongst directors claiming on their Personal Guarantee Insurance was an overconcentration on one or more customers who were late payers, which in due course, put a stranglehold on the creditor’s business.
Finally, when a business is doing well, it is tempting to raise finance to develop it further, but when growth slows, firms often find the finance cost becomes unaffordable. Todd Davison concludes: “Instances like overtrading can be avoided by focussing on profitability, rather than revenue growth. Equally, due diligence before an acquisition and trying not to put all your eggs in one customer’s basket can all help to make positive impacts on trading. Ultimately, everyone wants small businesses to succeed, as a personal guarantee insurer, none more than us. With personal guarantee insurance in place, however, the comfort of knowing that directors will not have to pay back business debt through their own finances, such as their home or personal savings can be hugely reassuring to small business owners.”
June 2023: Underlining the high stakes involved in being a small business owner in 2023, a new survey has uncovered that over a third (34%) have put their home and life savings on the line for their business by signing a Personal Guarantee for a business loan. If their business fails, they risk losing everything. Furthermore, 15% of those surveyed anticipate becoming a personal guarantor for a business loan within the year. The findings of the survey by Purbeck Personal Guarantee Insurance, demonstrates how difficult it has become for small business owners to access funding without taking the serious step of signing a personal guarantee.
Worryingly, the survey also found that while half of small businesses plan to secure new finance this year, 53% of these small business owners are borrowing to ease cash flow and 42% need the money to pay off existing outstanding debt.
Raising finance in a struggling economy is not easy and while the survey found that 43% will seek finance from a traditional lender in the form of a business loan, 28% plan to use their credit cards and 28% plan to use overdrafts to help fund their business. In addition, 1 in 5 (21%) will ask friends or family for cash.
Todd Davison, our MD said: ”In today’s turbulent economy, it will come as no surprise that small business owners are seeking additional finance but it has become increasingly difficult, since the Pandemic, for a small business to find funding without a personal guarantee requirement. It is vital that business owners fully understand the risks of signing a personal guarantee and importantly how to mitigate them. This can range from sharing the risk to using personal guarantee insurance to help settle the debt, should the business fail. So far in 2023, we have seen more SME owners apply for personal guarantee insurance[ii] (PGI) to mitigate the risk of business failure, than at any time previously.”
After the 2008 financial crisis, the popularity of leverage buyouts experienced a decline, but the use of this dynamic acquisition strategy is on the rise once again.
May 2023: A Freedom of Information request to the British Business Bank by Purbeck Personal Guarantee Insurance, the U.K.’s only provider of personal guarantee insurance (PGI) to small business owners has revealed the current level of debt and arrears associated with the Bounce Back Loan Scheme (BBLS), The Coronavirus Business Interruption Loan Scheme (CBILS) and the Recovery Loan Scheme (RLS). Purbeck’s analysis shows that over 145,000 BBL loans worth £3.8bn are in default as businesses continue to battle economic headwinds.
The findings come as latest estimates show that of £47 billion paid out in Bounceback Loans, £17 billion is already expected to be lost, £4.9 billion of that - over 10% of the loans - to fraud.
9% of Bounce Back Loans are currently in default, down fractionally from 12% in July 2022 with the average loan in default standing at £26,571.
While there are fewer CBILS loans in default - under 2% - this is a small rise on July last year when 1% of loans were in default. The average amount owed is £175k, from £164k in July 2022.
The analysis has also uncovered that businesses are typically borrowing £210k under the Recovery Loan Scheme which is open for applications until June 2024, and the average personal guarantee commitment made by business owners to secure a loan under the Scheme is £472k.
Bounce Back Loans default statistics:
For more information or to speak to one of our underwriters contact us today.
Purbeck Insurance Services is a trading name of Purbeck UK Limited which is a company registered in England and Wales under company number 10345620 and has its registered office at 20 - 22 Wenlock Road, London, N1 7GU Purbeck UK Limited is authorised and regulated by the Financial Conduct Authority. Firm permissions can be obtained from the FCA register. Purbeck UK Limited is a Managing General Agent and has binding authority to enter into and administer contracts of insurance on behalf of Markel International Insurance Company Limited.
