Lenders must spell out personal guarantee risks to small businesses

As lenders face new responsibilities to ensure business customers are clear about the risks of personal guarantees, a survey by Purbeck Personal Guarantee Insurance has found that 60% of small business owners have felt in the dark about the risks and 25% have backed out of a loan because it had a personal guarantee attached.

Todd Davison, MD of Purbeck Personal Guarantee Insurance said: “We welcome the strengthening provisions on personal guarantees by the LSB, the self-regulatory body for the banking and lending industry.  The reality is that many SMEs have viable businesses so may feel less inclined to fully consider the risks. Indeed, 19% of small business owners securing personal guarantee backed loans in Q2 2024 were doing so for investment in growth initiatives based on our analysis.

“However, short-term macro-economic conditions have made some small businesses more vulnerable, and accessing new finance to bridge the working capital gap has put them between a rock and a hard place where personal guarantees are concerned.”

Based on Purbeck’s data, loans for working capital made up circa 31% of personal guarantee insurance applications in Q2 2024, making it the main reason for securing finance and applying for Personal Guarantee Insurance. Furthermore, the average personal guarantee protected by insurance is £153k.

Todd Davison continues: “Personal guarantees are now part and parcel of SME lending yet for many business owners, the lack of understanding has been a barrier to proceeding with essential finance.  It remains vital that business owners seek expert, independent advice when faced with a personal guarantee and look at the ways they can mitigate the risk. This might include sharing the guarantee with a co-director, guaranteeing part rather than the whole of the loan, or taking personal guarantee insurance.”