Half of Small Business Owners Weighed Down by Personal Guarantees, Study Finds

  • A substantial portion (49%) of small business owners currently assume personal guarantor responsibilities for business loans, or have future plans to undertake such roles by the year-end.
  • In 2023, a significant 50% of small business owners have either obtained or are actively seeking new financing options to bolster their operations.
  • Of this group, 42% have identified the urgent need for funds to address outstanding debts.
  • When small businesses adopt appropriate risk mitigation measures, personal guarantees can prove beneficial and viable.

Underlining the high stakes involved in being a small business owner in 2023, a new survey has uncovered that over a third (34%) have put their home and life savings on the line for their business by signing a Personal Guarantee for a business loan. If their business fails, they risk losing everything.  Furthermore, 15% of those surveyed anticipate becoming a personal guarantor for a business loan within the year. The findings of the survey by Purbeck Personal Guarantee Insurance (conducted amongst 400 owners and managers of small businesses across the UK, 28th April 2023), demonstrates how difficult it has become for small business owners to access funding without taking the serious step of signing a personal guarantee.

Worryingly, the survey also found that while half of small businesses plan to secure new finance this year, 53% of these small business owners are borrowing to ease cash flow and 42% need the money to pay off existing outstanding debt.

Raising finance in a struggling economy is not easy and while the survey found that 43% will seek finance from a traditional lender in the form of a business loan, 28% plan to use their credit cards and 28% plan to use overdrafts to help fund their business.  In addition, 1 in 5 (21%) will ask friends or family for cash.

Todd Davison, MD of Purbeck Personal Guarantee Insurance said: ”In today’s turbulent economy, it will come as no surprise that small business owners are seeking additional finance but it has become increasingly difficult, since the Pandemic, for a small business to find funding without a personal guarantee requirement. It is vital that business owners fully understand the risks of signing a personal guarantee and importantly how to mitigate them.  This can range from sharing the risk to using personal guarantee insurance to help settle the debt, should the business fail.  So far in 2023, we have seen more SME owners apply for personal guarantee insurance (PGI) to mitigate the risk of business failure, than at any time previously.”

Personal guarantee insurance (PGI) is an insurance product used by small business owners to protect against the risk of a personal guarantee being called in for a business loan, if the business becomes insolvent.

Five ways a personal guarantee can work for a business:

  1. Before signing a personal guarantee on a loan, independent advice should be obtained from an accountant, solicitor or personal broker who can advise on ways personal risk might be cut.
  2. It is beneficial to establish if the personal guarantee can be shared amongst co-directors so the risk is not shouldered by one person.
  3. Ask the lender if a time limit can be agreed for the guarantee or a cap on the amount, but remember, if interest rates rise, costs added to the debt can mount up.
  4. See if there is the option to guarantee part of the loan meaning that settlement of the debt is sought first from the company’s assets, before enforcing the guarantee.
  5. Consider personal guarantee insurance to mitigate the risk which means that, in the event of a business failure, 80% of the loan will be settled by the insurance rather than the business owner’s personal assets.

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