Start-ups face funding hurdles – 46% rise in founders taking personal guarantee insurance

As the deadline to provide evidence for the Inquiry into SME Finance draws close, new data shows that the founders of start-up businesses in the UK are increasingly facing demands to sign a personal guarantee as security for a business loan. Analysis of applications for personal guarantee insurance (PGI) by Purbeck Personal Guarantee Insurance, shows the number of start-up founders taking insurance to protect their personal assets rose by 46% in 2022 on 2021 and looks set to rise again in 2023. With PGI in place, if the business does fail, 80% of the loan will be settled by the insurance rather than the business owner’s home, savings and other personal assets being called on to settle the debt.

While the findings underline how common it has now become for lenders to demand personal guarantees for business loans to start-up businesses, they also demonstrate how start-up founders are becoming savvier to the risks and are taking steps to mitigate them.

Purbeck’s analysis shows that most start-ups have taken on unsecured loans. In this case the lender has no way to recover the loan if the business fails, other than through the personal guarantee.  The average start-up loan backed by a personal guarantee according to Purbeck, was £181,350 in £2022, a very small increase on 2021 when it was £181,307.  However, the value of loans being secured by start-ups in 2023 has dropped with the average loan standing at £166,534.

Todd Davison, MD of Purbeck Personal Guarantee Insurance says: “For some people, signing a personal guarantee is part and parcel of the risks involved in starting a business, for others it is a source of stress and anxiety, not just for themselves but for their families too. If a start-up owner/founder doesn’t want to sign a personal guarantee, their funding options become quite limited.  However, a Personal Guarantee shouldn’t always be a barrier to finance.

“We’re seeing a growing number of start-ups turning to Personal Guarantee Insurance. In fact entrepreneurs in the UK collectively secured £66mof funding for a new venture in the past four years through personal guarantee backed loans that were protected by Personal Guarantee Insurance.

“Start-up founders should always seek expert, independent advice before signing a personal guarantee and look at the ways they can mitigate the risk, including through Personal Guarantee Insurance.”