May 2022: Following news that UK ministers are poised to launch a new £3bn recovery loan scheme that will require business owners to provide personal guarantees, Todd Davison, MD of Purbeck Personal Guarantee Insurance has cautiously welcomed the move but is urging the Government to ensure SMEs are under no illusions about the risks given the current challenges many businesses are facing.
Todd Davison said: “A successor to the Recovery Loan Scheme has been on the cards for some time and given the low take up of the RLS due to the strict qualifying criteria, we hoped a new scheme would be more accessible.
“It seems accessibility could come at a cost in the form of a personal guarantee requirement. Our fear is that business owners will commit to accepting liability for their company’s debt at a time when they are already dealing with rising energy costs, labour shortages, late payment and on-going supply chain issues that contrive to make cashflow predictions very difficult.
“We hope that when this new scheme is formally announced, the Government makes abundantly clear both the risks of signing a personal guarantee for a business loan and how to mitigate them. It’s vital business owners appreciate the personal stake they are taking in their business by signing a personal guarantee.”
What is a personal guarantee?
A personal guarantee gives the lender a written promise, made by a director or number of directors, to accept liability for a company’s debt. This means that if the business defaults on a loan, the director’s home, car and anything in their personal bank account could be used to settle the outstanding debt. If they co-own their home, with a spouse or partner – they will also have to sign the guarantee.
If the personal assets aren’t sufficient to cover the debt, the business owner could find themselves facing bankruptcy which would have long term ramifications and stop them from being a company director in the future. A lender will go after whoever has the most chance of settling the debt so a minority stake holding in the business won’t offer protection.
Purbeck’s tips on how to cut the risk of a Personal Guarantee
- Before deciding that signing a personal guarantee is right or wrong, business owners should get some independent advice. An accountant, solicitor, commercial broker or financial adviser can help work out the best options for the business and advise on the additional ways the personal risks can be cut when signing a personal guarantee.
- Come to an agreement to share the guarantee with co-directors.
- Work out with the lender if a time limit can be agreed for the guarantee and a cap on the amount but bear in mind that interest rates are rising and costs added to the debt can soon mount up.
- Investigate if part of the loan rather than the whole loan is guaranteed and that settlement of the debt is sought first from company’s assets before enforcing the guarantee. Clearly in this instance the business owner will need to show what assets within the company could be used – this could be machinery, tools, computer equipment.
- Consider Personal Guarantee Insurance to mitigate the risk. This means 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.
The level of cover is based on a fixed percentage of the personal guarantee the company director wishes to insure. This is dependent on whether the corresponding finance facility is secured or unsecured.