Are you a closeted personal guarantor? Why SME owners are secretly backing their business loans

The personal financial risk of becoming a personal guarantor for a business loan has become a fact of life for 1 in 3 small business owners but it’s also a secret for 1 in 5.  This is according to a new survey of 1000 SME business owners and directors by Purbeck Personal Guarantee Insurance. 

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, 64% 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. 

Data from the British Business Bank reveals the full scale of personal risk SME business owners took through the Coronavirus Business Interruption Loan Scheme (CBILS).  As of 31 March 2021 when the CBILS scheme closed, 1,981 loans to the value of £1.54bn were advanced with a personal guarantee in place as security for the lender.

In addition, 356 loans to the value of £579k were advanced with personal property as security. This takes the total value of loans advanced that pose a personal financial risk to the business owner, to £2,113,989,718, with the average CBILS loan backed by a personal guarantee £774,389.

A Personal Guarantee puts the borrower’s home and personal assets on the line as security if the business fails and the loan is called in. Under CBILS, for loans of more than £250,000 lenders were permitted to ask for additional security from the borrower in the form of a personal guarantee.  

Based on the average loan of £774,389, if the business has minimal assets the owner could need to pay back close to £154,877 to the lender. 

The CBILS approval rate was 42%. It is expected that the approval rate for RLS will be half of this. For many firms, access to further funding through the Recovery Loan scheme will be off limits as they will have capped out on the maximum loan value with CBILS or they may not meet the much more stringent affordability measures.

Seeking finance independently is therefore highly likely to hinge on signing a further personal guarantee so it is really vital business owners are made aware of the steps they can take to protect their personal assets.

The additional concern is whether firms will be able to pay the loans back, with interest rates of up to 15%, following the 12 month grace period.

According to Todd Davison, MD for Purbeck Personal Guarantee Insurance, we could see thousands of firms struggling to meet the repayments. “Maintaining dialogue with the lender and calculating costs so that they can be factored into the business’s outgoings will help businesses identify at the earliest opportunity where they may need additional support as we get to other side of the pandemic,” he said.

Amongst the survey respondents, 24% took the loan outside of the Government’s support schemes, putting their home and life savings at risk if their business fails. A further 10% agreed to sign a personal guarantee to access funding as part of the CBILS. 

The average debt for which the director would be liable if their business fails, estimated as £154,000. Yet 22% have not informed their partners of the risk to their personal assets should the business fail. 

Prior to 2020, 21% of the business owners surveyed were already acting as a personal guarantor for a business loan.  Furthermore, 8% anticipate they will become a personal guarantor for a loan in 2021.

“Signing a personal guarantee is a huge step for any business owner and it is easy to understand why some may feel reluctant to share this decision with their partner or spouse given the risk it can pose to the family home and other personal assets,” Davison said. 

”If a personal guarantee puts joint assets at risk – it should really be a joint decision in a relationship.”

Todd Davison, Purbeck Personal Guarantee MD

Business owners need to understand that there are ways they can mitigate the risks of personal guarantees, including through insurance. Finance professionals have a role to play here, Davison adds. 88% of the proprietors of small businesses surveyed said lenders and financial advisers have a duty to make business owners aware of personal guarantee insurance. ”Knowing there is a way to protect their personal assets could give many small business owners the confidence to become a personal guarantor for a business loan – it might also make the news a great deal easier to share with their partner.”