December 2023: Responding to FSB’s Super-Complaint to the FCA over SME lending practices Todd Davison, MD of Purbeck Personal Guarantee Insurance says:
“Around 45% of firms back off from a finance deal if they find out there is a personal guarantee attached. Personal guarantees must be proportionate to the loan being advanced and appropriate for each case. We support a full investigation by the Financial Conduct Authority into lending practices and whether personal guarantees are being overused by lenders, particularly in low value loans.”
The latest Purbeck Personal Guarantee Monitor shows that working capital is the top reason for new personal guarantee-backed loans - 47% of applications for personal guarantee insurance (PGI) were for this purpose in Q3 2023. Furthermore, the main source of funding is unsecured loans, typically provided by alternative lenders - Purbeck saw more applications for PGI in respect of unsecured loans than at any time in the past 6 years, in Q3 2023.
Todd Davison continues: “It is important to recognise that personal guarantees are a core element of the commercial finance market, particularly among alternative lenders. Therefore, while we want to a proper investigation by the FCA, we feel that any moves to discourage personal guarantees should not lead to lenders either failing or pulling out of the market. This would reduce choice for small businesses when they are searching for a new loan.
“Education on how to mitigate the risks is also key here and commercial finance brokers been commended in the Government’s Inquiry for the hugely valuable role they play in that process as they work with small businesses to find the right solutions for their needs. Our research shows that 64%v) of small business owners would be more likely to sign a personal guarantee if they had insurance in place to protect against the risk of providing it. Therefore, along with a review of lending practices, we’d like to see greater awareness of the risk mitigation strategies small business owners can consider before they take the big step of signing a personal guarantee.”
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