Funding through Personal Guarantee backed loans could be only option.
Purbeck Personal Guarantee Insurance, provider of the UK’s only Personal Guarantee Insurance to SME business owners and directors, is warning that many SMEs could find themselves excluded from the Recovery Loan Scheme which launched on 6th April 2021, with little option other than to access finance through personal guarantee backed loans – putting their home and life savings at risk if their business subsequently fails.
The Office for Budgeting Responsibility is forecasting that £12 billion[i] will be advanced under the Recovery Loan Scheme, however, Purbeck Personal Guarantee Insurance is highlighting that this is less than 20% of the funding provided under the BBLS and CBILS precursors over the last 12 months with approval rates for the Recovery Loan Scheme likely to be similar to the levels seen with CBILS at 42%[ii].
Access to the Recovery Loan Scheme will be dependent on stringent affordability checks and any existing use of CBILS/BBLS will be taken into account for the purpose of the “business maximum amount”. This could exclude many SMEs from eligibility. Currently, the scheme can only be accessed through 18 accredited lenders, plus fees and interest will be incurred from day one.
Todd Davison, MD for Purbeck Personal Guarantee Insurance said: “The Recovery Loan Scheme is a welcome move but it is an entirely different proposition to the Government backed schemes that went before, with much greater emphasis on affordability. This will leave some of the most severely impacted businesses such as those operating in retail, travel and hospitality, out in the cold. At this stage, with just 18 lenders accredited under the scheme compared to over 100 offering CBILS, there will be less choice for SMEs until more lenders come on board. Also, of the lenders already accredited under the scheme most are banks and likely to favour existing deposit holders.
“The demand for finance will ramp up as the economy and general trade starts to open up from April 12th and businesses may wish to take on finance to help accelerate growth and smooth working capital cycles with their customers and suppliers. We anticipate as a result, many firms unable to access the Recovery Loan Scheme will start looking at alternative finance options which are highly likely to require Personal Guarantees as security for the lender.
“It is vital SMEs go into any new finance agreements with their eyes wide open to the risks of signing a personal guarantee, and pre-emptively taken out personal guarantee insurance. This ensures that up to 80% of the risk is covered, offering a business owner or director protection from the potential loss of their personal assets. This peace of mind will allow them to focus more fully on rebuilding their business and exploit the growth in business and consumer confidence with the continued roll out of the UK vaccination programme.”
[i] Office for Budgeting Responsibility Economic and Fiscal Outlook, March 2021
[ii] Calculated as 98,344 approvals for 233,247 applications for CBILS https://www.gov.uk/government/collections/hm-treasury-coronavirus-covid-19-business-loan-scheme-statistics