New figures published by Purbeck Personal Guarantee Insurance show a dramatic 123% year on year increase in the use of personal guarantees for business loans in 2022. This raises a number of questions, not least regarding the lack of access smaller businesses have to funding options for growth opportunities and the use of secured loans to prop up failing businesses. Yet, what is perhaps more concerning is the continuing lack of understanding that many business owners have when taking out loans with personal guarantees.
Binding your personal wealth to your business finances
It was, at one point, unthinkable to bind business liabilities to personal finances. Limited liability loans were standard and provided personal protections to business owners and directors. Over time, these protections have diluted to the point where, today, it is common place for a lender to ask for a personal guarantee on a business loan. This security can come in the form of a charge over the individual’s home or other personal assets.
While no individual would enter this situation with the expectation of losing their home, the reality is that cases of personal insolvency and bankruptcy are on the rise in the current economic climate. And personal guarantees called in due to business failures are a contributor.
Is personal guarantee insurance the answer?
Whilst it is positive to hear that personal guarantee insurance has increased alongside these loans, it is also a sign that this form of lender security has become the norm. For business owners who want to mitigate their risks to the fullest, the premiums will be dear but can be the difference between repayment or insolvency. Overall, it is not an ideal situation for business owners, especially of smaller businesses. But, for those who have found this to be the only funding option available, there is some well needed protection from insurance.
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Personal guarantees and insolvency
Unfortunately, the future of UK business is unpredictable and no more so than at the moment. The October statistics from the Insolvency Service show that corporate insolvencies were up 38% year on year and 32% higher than the three years previously. Individual Voluntary Arrangements (which have become a preferred alternative to the stigma of bankruptcy) are also on the rise. Although there is no specific data on the link between both being driven by personal guarantees, this issue has increasingly been at the forefront of many recent personal insolvency cases.
What you need to consider with a personal guarantee
If you are a business owner who is considering taking out a business loan with a personal guarantee attached, there are number of factors to assess before committing:
- You should thoroughly evaluate your business’s financial position and ability to repay the loan over the term. If in doubt it is best avoided
- Talk to your lender about borrowing options and flexible repayment terms, and understand the risks of defaulting on the loan
- Work with a professional business advisor to research other potential funding options for your business
- Consider your businesses operational situation. If the loan is being taken due to cash flow concerns or to prop up working capital, this is inadvisable and you should consider the solvency of the business going forward
Look out for the next article on personal insolvency, where we will be discussing dispute resolution and the advantages of working with a professional advisor to attain the best agreement on your credit.
How we can help
We have extensive experience in advising business owners on business funding, personal guarantees and repayment terms and we will always work with you to find the best solution for you and your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 020 3326 6454 and we will arrange for a call with one of our Partners.
AUTHOR
This guidance article was written by our Personal Insolvency Specialist, Paul Mallatratt, Partner at Opus.
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