Purbeck Personal Guarantee Insurance cautions SMEs over Personal Guarantee risks

Purbeck Personal Guarantee Insurance, provider of the UK’s only Personal Guarantee Insurance to SME business owners and directors has welcomed the new Government backed Recovery Loan Scheme launching in April 2021[i] but fears many small business owners will agree to providing a Personal Guarantee for loans over £250,000, without fully understanding the risks and how to mitigate them. On this basis, greater emphasis and accountability should be enforced to ensure that SME borrowers have sought independent legal advice before committing to a Personal Guarantee backed loan.

Purbeck’s analysis of personal guarantee backed loan facilities under the existing Coronavirus Business Interruption Loan Scheme found the average loan was £766,000^[ii], equating to a potential obligation of over £150,000 to be met by a Personal Guarantee from the business owner or director, if their business fails.

Purbeck Personal Guarantee Insurance has also calculated that interest on repayments on a £766,000^[iii] loan could amount to £144k[iv] at 7% interest to £327k at 15% interest making the total amount repayable between £910k and £1,093k over the term of the loan at 7% and 15% interest, respectively. It is therefore vital that firms know that they can afford repayments before taking on a loan under the new scheme. 

Todd Davison, MD of Purbeck Personal Guarantee Insurance said:

“The new, Recovery Loan Scheme is welcome but comes with some very big catches, chief of which is a Personal Guarantee for loans over £250,000 which puts the business owners/directors’ personal assets, excluding their home, at risk if the business fails. Our concern is that only around 4 in 10[v] small business owners understand what a Personal Guarantee is so there needs to be much greater awareness of the risks and how to mitigate them.”

“Personal Guarantee Insurance can help mitigate this risk so that if the business does fail, up to 80% of the loan will be settled by the insurance rather than the business owner’s savings and other personal assets being called on to settle the debt.   Business owners can also consider splitting the Guarantee between fellow directors; negotiating a time limit for the Guarantee and a cap on the amount; or seek to agree terms so that the lender seeks settlement from company’s assets before enforcing the Guarantee."  

“SME business owners are being given another lifeline by the Government but they need to know what they are getting into and how to cut the risks”.

The Government has confirmed a new Recovery Loan Scheme for loans from £25,001 up to £10m, 80% of which will be guaranteed by the Government[vi]. Personal guarantees will be required on facilities over £250,000, but a borrower’s principal private residence cannot be taken as security. Once received, the finance can be used for any legitimate business purpose, including growth and investment. The scheme launches on 6 April and is open until 31 December, subject to review. Loans will be available through a network of accredited lenders, whose names will be made public in due course.

With personal guarantee insurance, you can cover up to 80% of your risk, so you’re personally protected as you plan the future funding and growth of your business. For more information on what personal guarantee insurance entails, speak to one of Purbeck’s specialists today on 0208 004 7250.

[i] https://www.gov.uk/guidance/recovery-loan-scheme

[ii] Calculated based on the number of loan facilities - 1587

[iii] Calculated based on the number of loan facilities - 1587

[iv] Repayments calculated using a constant interest rate and amortising over a 60-month loan term on a capital and interest repayment basis.

[v] Censuswide survey of 500 SMEs 2019

[vi] https://www.gov.uk/guidance/recovery-loan-scheme