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.
Based on our latest survey, 53% of SME business owners already had personal guarantees in their name for a business loan at the end of 2020 and a further 9% took a loan with a personal guarantee in 2021(ii).
Todd Davison, our MD, says: “The Recovery Loan Scheme (RLS) closes to applicants at the end of June but uptake has been far below what was expected. We believe this is in large part due to the strict qualifying criteria. It has become increasingly clear that there would need to be a long-term successor to the Enterprise Fund Guarantee(iii) which was in effect ‘mothballed’ when the pandemic hit and businesses needed faster access to funding.
“If a new lending scheme can help to support SMEs in underserved markets and promote the levelling up and ESG agendas, it can only be a good thing but there needs to be close attention to the level and requirements for personal guarantees given the personal risks they pose to business owners if insurance has not been put in place.
“On the one hand, many SME owners and directors are emerging from the pandemic having already taken the significant step of signing a personal guarantee for business a loan. On the other, those business owners who have avoided signing a personal guarantee so far, may be deterred from applying for funding if this is a requirement. A delicate line needs to be found in setting personal guarantee requirements at the right level and more awareness needs to be built around the ways business owners can mitigate the risks to make this decision much less stressful. We are keen to work with the Government and lenders to help build this awareness and deliver greater peace of mind to UK SME owners and directors.”
A Freedom of Information request by us in 2020 revealed that the Enterprise Finance Guarantee supported £1.033bn in loans in the prior 5 years – of which £286m (just under 30%) was backed by personal guarantees signed by the owners/directors of small and medium sized businesses applying for funding. The average annual lending under the EFG during this time was £206 million – this is significantly lower than the funding provided under CBILS and the RLS.
ii Survey of 1,000 SME business owners in April 2021 for Purbeck by Gorkana/Cision