Small firms steer clear of business loans with personal guarantees

Written by: Rachel Miller

Date: 27 February 2024

An entrepreneur considers whether he should give a personal guarantee for a business loan

New research has found that many business owners are reluctant to take out loans to help grow their business because of the risk to their personal assets, including their homes.

New research conducted by Purbeck Personal Guarantee Insurance has revealed a worrying lack of understanding of personal guarantees in the context of business loans amongst small businesses. The survey has found that personal guarantees can place a lot of stress on a director and deter them from seeking finance, with 13% of small business owners polled reporting that they have backed out of a loan due to the demand for a personal guarantee.

The survey shows that there is widespread confusion about personal guarantees among business owners. Six in ten (60%) of small business owners surveyed either have no idea or are unsure what a personal guarantee is - despite the fact that 30% of respondents said they plan to take on new finance in 2024.

Once it was explained how personal guarantees work, 24% incorrectly thought the current minimum threshold for a loan to require a personal guarantee is £10,000. There is currently no minimum threshold for a personal guarantee to be requested by a lender. However, only 29% of the directors and owners of small businesses surveyed want personal guarantees to be banned for small business loans. Most said a threshold should be set between £10,000 and £20,000.

"Business owners must be pragmatic. While it's easy to empathise with the sentiment that personal guarantees should be banned on loans to small businesses, it is understandable that alternative lenders will need some assurance of repayment if the business fails. Fundamentally, small business owners need to understand the risk mitigation strategies they can take before signing a personal guarantee. These include sharing the guarantee with a co-director, guaranteeing part rather than the whole of the loan or taking personal guarantee insurance." Todd Davison, md, Purbeck Personal Guarantee Insurance.

Personal guarantees are "straitjacket" on small firms

The Federation of Small Businesses (FSB) has issued a super-complaint to the Financial Conduct Authority (FCA) to call out banks' widespread use of harsh personal guarantees which can force small business owners to put their homes on the line in order to take out a small loan.

The FSB says that personal guarantees can be a "straitjacket" on business growth, forcing entrepreneurs to put their homes or other assets on the line when taking out finance - even small loans that are easy to repay.

"Put yourself in the shoes of an entrepreneur who's created a promising business and is keen to grow. You approach your bank for a small loan, but they say you can only have the money if you sign a personal guarantee which would ultimately put your family home or other assets at risk. This is a straitjacket on small business growth. It is no wonder that many small business owners in that position are telling us they are choosing to avoid external funding which they could be using to capitalise on new opportunities. For amounts which are triflingly small for banks, but potentially transformational for small business owners, a strong dose of proportionality is required rather than a blanket imposition of personal guarantees." Martin McTague, FSB national chair.

The FCA has 90 days to respond to the FSB super-complaint and is expected to issue its findings in the coming days.

Written by Rachel Miller.

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