Finance Insights

Managing risks in business


The last 12 months have been difficult for us all. With the coronavirus pandemic wreaking havoc on the world’s economy, SMEs have faced unprecedented struggles, with many Directors seeking external funding to help them weather the storm.

But for 1 in 3 of them, the personal financial risk of becoming a personal guarantor for a business loan has become a fact of life and, more worryingly, it’s also a secret for 1 in 5. This is according to a new survey of 1,000 SME business owners and directors by our partnering Personal Guarantee Insurance specialist.

Based on the survey, 34% of small business owners had to make the difficult choice to become a personal guarantor for a business loan in 2020. This means that if the business defaults on the loan, the lender is able to seek settlement of the debt from the director’s personal assets. For some, it’s a risk too far – 45% said they had decided against a loan because it required a Personal Guarantee. However, 66% said they would be more likely to sign a personal guarantee if there was insurance in place to protect against the risk of providing it.


Access finance can unlock growth

Lending to SMEs fluctuates every year and many small businesses still expect Brexit to make it more difficult to access finance. One of the key influences in the lending flows is the appetite from business owners to seek funding. A high proportion of businesses never seek to borrow, which limits their ability to grow. Somewhat ironically, if too many SMEs ‘play it safe’, it could be counterproductive. Representing over 99% of UK businesses, SMEs provide 60% of private sector jobs and account for almost 50% of all private sector turnover. As such, when SMEs stagnate, so too does the economy.

There is good news though. For more ambitious businesses, business funding is certainly available. But as a condition of raising finance, lenders often ask directors to sign a Personal Guarantee. While four in ten SMEs don’t think that Brexit will affect them the slightest, they might still be inclined to play it ‘safe’ and use cash reserves to fund growth, rather than seek external finance and put their personal estates at risk.

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Demystifying Personal Guarantees

Personal Guarantees (PGs) are a common feature of the business finance market. Lenders see them as a sign that a director or business owner is fully ‘invested’ in their plans. The industry speak for this is ‘skin in the game’. On the other hand, many directors do not want to put their home at risk when something goes wrong in their business. While there is a risk, it is important to note that not all PGs automatically include a legal charge over your home. As with any other contract, you should seek independent legal advice before signing because terms do vary.

A very effective way to mitigate this particular risk is to consider Personal Guarantee insurance. Such cover kicks in, in the event of a PG being called in. The insurance guarantees lenders that up to 80% of their loan is repaid. The remaining 20% is much more manageable for business owners that find themselves in unexpected difficulty.

Available against a range of business loans (both secured and unsecured), Personal Guarantee insurance is very flexible. And knowing that there is cover in the event that things don’t play out can remove a great deal of anxiety. With this knowledge, directors may enter into a Personal Guarantee which opens up choice. In fact, a survey conducted by Censuswide last year revealed that 74% of SMEs would be more likely to take out a loan with a Personal Guarantee if they could insure against the risk of providing it. And through the greater choice, businesses can access funding on more competitive terms.

Key features of Personal Guarantee Insurance:

  • Premiums are competitively priced and based on individual circumstances.
  • Cover is available for Personal Guarantees signed to support a wide range of business finance facilities.
  • Insurance policies backed by an A-Rated insurer.


How we help

Check if you are eligible for Personal Guarantee Insurance here.

Lastly, please let us know what you think of the new savings comparison service? We’d love to get your feedback. It will help us challenge the assumptions that some things take too long or aren’t worth doing.

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