Personal Guarantee backed loans risk being dismissed in favour of credit cards and overdrafts
September 2021: Following news that access to finance remains one of the major obstacles to entrepreneurial activity in the UK[i], we are urging entrepreneurs to educate themselves on the pros and cons of signing a personal guarantee for a business loan rather than rely on credit cards and overdrafts. The GEM UK report has found that two thirds of UK adults have been inspired by the pandemic to start up a business in the next three years[ii].
In our latest survey[iii], 45% of SME business owners said they had decided against taking out a business loan because it included a personal guarantee, but 64% said they’d be more likely to sign a personal guarantee if there was insurance in place to protect against the risk of providing it. Personal guarantee insurance is now mitigating the risk of start-up business loans to the value of £35m taken out during the last three years[iv].
Todd Davison, our Managing Director, said: “Entrepreneurs now more than ever will face the difficult decision of whether to sign a personal guarantee as security to the lender for a business loan or to source funding from their own back pockets using credit cards and overdrafts, or from friends, family and investors. Indeed we found that aside from the Government loan support schemes, credit cards and overdrafts have been the most common sources of funding for small businesses over the last two years[v].
“Our survey suggests many business owners/directors walk away from a loan agreement backed by a personal guarantee without knowing how to mitigate the risks. There will be others who sign on the dotted line not understanding they could lose their home, car and other personal assets if the business fails. It is vital entrepreneurs fully understand their options. Speaking to an accountant, financial adviser, commercial finance broker or their bank is a good first step. Aside from Personal Guarantee Insurance which will cover up to 80% of the guarantee, there are other ways entrepreneurs can mitigate their personal risk such as sharing the guarantee with other directors.
“Starting up a business can be both fraught and exciting. By sorting out the finances first giving due consideration to all the options available, entrepreneurs can focus on making their pandemic inspired idea a success.”
[ii] https://www.enterpriseresearch.ac.uk/gem-uk-2020-report-2/ the GEM UK 2020 report is the most authoritative annual research into entrepreneurial activity and trends
[iii] 1000 SME Owners and Directors, April 2021
[iv] Source: Purbeck Personal Guarantee Insurance
[v] 1000 SME Owners and Directors, April 2021