Small businesses are ignorantly signing up to livelihood threatening loan conditions, according to a new report by Wirefund.
The majority of small and medium-sized enterprises (SMEs) have no idea what a personal guarantee is, despite it being a requirement from banks and many alternative finance providers when lending to businesses.
Over half (55%) of SME business owners revealed they do not know what a personal guarantee is, whilst 21% believe it only means that business owners would pay money back on time to the best of their ability.
In the survey of over 500 senior SME decision makers, 61% do not realise how far-reaching the liabilities associated with personal guarantees are, in that they relate to personal assets, not just business assets.
The research also found only 8% realise how inescapable personal guarantees are and that high-street banks always require them, with 20% thinking high street banks never or rarely require a director to put their own assets down as collateral.
Amit Sankey, CEO and founder of Wirefund said: “Personal guarantees are opaque and outdated tools, misunderstood and misaligned with the needs of British business. Our research shows very clearly that SME owners do not know what they are and are taking on huge, hidden risk as a result.”
The study also found the majority (79%) stated they had not been put off a business loan because it included a personal guarantee. However, shockingly 55% of those SME owners did not understand what a personal guarantee was
The report highlights personal guarantees are not fit for purpose and business loans are built on a dangerous, misunderstood practice, said Wirefund.
Not only is there a severe underestimation of personal risk among SME owners, but personal guarantees do not match the typical asset ownership of today’s entrepreneurs either.
The report goes onto explain how SME loans can be provided without personal guarantees, with smarter, more relevant risk management techniques.
Mr Sankey added: “We can do small business finance without personal guarantees and we should, because if enforced, they can have devastating effects. I have seen it first-hand.
“Business finance shouldn’t ruin lives, it should be building lives, businesses and communities. SMEs are the growth engine of our economy – it’s time finance was properly on their side.”