News

2023 has been a tough year for UK businesses, particularly SMEs, who have had to navigate treacherous economic waters. 

Business buy-to-let mortgages provide an excellent opportunity for businesses to invest in commercial property, whether to be let to a third party or to be used as premises to trade from.

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.

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%

• - 78% of small business are in profit despite late payment affecting 81%
• - Just 7% of small business owners have had to take a pay cut
• - Only 1% of small businesses are close to insolvency
• - Personal guarantee insurance can provide peace of mind for small business owners

With the UK’s turbulent economic climate, it’s no surprise that businesses, from SMEs to large corporations, are facing financial challenges.

• -    Failed acquisitions a leading reason for small businesses to go insolvent
• -    Overreliance on accountants to keep on top of the numbers
• -    Solid steps can be taken to avoid insolvency pitfalls
• -    Personal guarantees can provide peace of mind for small business owners

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.”

• -    49% of small business owners are personal guarantors for a business loan or plan to be by the end of the        year
• -    50% of small business owners have already or are planning to secure new finance in 2023
• -    42% of these people need the money to pay off outstanding debt
• -    Personal guarantees can work for small businesses if they mitigate the risk

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.”