A personal guarantee doesn’t mean signing away your home

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Todd Davison

Guest post by Todd Davison of Purbeck Insurance Services

The UK and has just entered its third lockdown and many SMEs will be fearful of the impact this will have on their finances and cashflow.  A recent study by Starling Bank found that, while small businesses are more confident about their prospects for 2021, 42 per cent think they will need financial support this year.

The problem is that SME access to finance is increasingly going to necessitate signing a Personal Guarantee as lenders become more risk-averse.

At the same time, the risk of signing a Personal Guarantee has increased following new insolvency rules introduced in December which made HMRC a preferred creditor in a business insolvency.  In essence, this may reduce the ‘pot’ of funds left to pay existing Personal Guarantee-backed loans meaning a director or business owner could find that, as the loan is called in, their personal assets need to be used to settle the debt.

It is therefore crucial they understand how they can mitigate the risks of signing a Personal Guarantee, with Personal Guarantee Insurance becoming an increasingly common option.

What is a personal guarantee?

Personal Guarantees give the lender a written promise, made by a director or number of directors, to accept liability for a company’s debt.  In practice, this means that if the business defaults on a loan, the director’s home, car and anything in their personal bank account could be called on to settle the outstanding debt.

A minority stakeholding in the business won’t protect you either as a lender will go after whoever has the most chance of settling the debt

You could even find yourself facing bankruptcy if your personal assets don’t cover the debt.  This obviously has much longer-term ramifications, including prohibiting you from being a company director in the future.

If you co-own your home, your partner will also have to sign the guarantee.  A minority stakeholding in the business won’t protect you either as a lender will go after whoever has the most chance of settling the debt.

Personal guarantees can apply to a wide range of loan facilities including those available from P2P lending platforms – in fact at Purbeck we see most of the demand for Personal Guarantee Insurance coming from the alternative finance market.  In addition, the Government backed CBILS (Coronavirus Business Interruption Loan Scheme) permits the use of personal guarantees as security for loans over £250,000.

The dilemma

Signing a guarantee to secure access to funding is a risk some small business owners are willing to take while others see it as a step too far.  In a survey[i] we conducted amongst SME owners and directors, almost a third said they’d decided against taking out a loan because of a personal guarantee.

However, a growing number of SME owners and directors are turning to Personal Guarantee Insurance to mitigate the risk and deal with that dilemma.

Over £100m in SME personal guarantees protected by insurance

Since launch, Purbeck Insurance Services has protected over £100m in Personal Guarantees, giving business owners and directors the confidence to secure finance knowing that if the business fails, the majority of the loan would be paid off without risk to their home and assets.

You can also negotiate a time limit for the guarantee and a cap on the amount, but do remember interest and costs added to the debt can soon mount up

Just like any other insurance, it protects against the risk of the worst happening – in this instance the risk that your business fails and the guarantee is called in by the lender.  Insurance will offset any outstanding obligations called in with the level of cover based on a fixed percentage of the personal guarantee the company director wishes to insure.  This is dependent on whether the corresponding finance facility is secured or unsecured.

The big difference with this type of insurance is that it does a lot more than simply pay out following a claim. Personal Guarantee Insurance from Purbeck includes access to free mentoring and support services if your business gets into financial distress, plus the huge benefit of expert guidance at the point the debt needs to be settled.  This takes a huge burden off the shoulders of the business owner.

Other ways to mitigate the risks

Before deciding, it is always important to get some independent advice.  Your accountant, solicitor, commercial broker or financial adviser can all help you work out the best options for your business and advise on the additional ways you can cut the personal risks you might face by signing a personal guarantee.

For example, if you run your business with co-directors, come to an agreement to share the guarantee.  You can also negotiate a time limit for the guarantee and a cap on the amount, but do remember interest and costs added to the debt can soon mount up.

You may also be able to agree terms where you are guaranteeing a part of, rather than the whole,  loan and that settlement is sought first from company’s assets before enforcing the guarantee.

Whether your SME business needs funding to start, sustain or grow, a Personal Guarantee shouldn’t stand in the way of the finance you need.  Seek expert advice and look at the ways you can mitigate the risk, including Personal Guarantee Insurance, before signing on the dotted line.

Todd Davison is MD of Purbeck Insurance Services