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Business owners must prepare themselves for the personal guarantee question


Todd Davison, MD, Purbeck Personal Guarantee Insurance

Inflation hit a 41 year high in October 2022 1 and while many small businesses have risen their prices based on a recent survey 2 by Purbeck Personal Guarantee Insurance, they are still bearing the brunt of a lethal combination of rising energy bills, increasing supply costs and late payment issues to name a few. As the Federation of Small Businesses so aptly puts it – we are in the midst of a ‘cost of doing business crisis’.

It is clear that access to funding is going to be a matter of survival for many small firms over the next year. In fact, while rising prices and cutting energy use are the top tactics being employed by small firms to help cope with their cost challenges, our survey findings reveal that close to 1 in 3 small business owners (29%) are already planning to secure some form of new finance to get them through this extremely challenging period.

The problem is that the cost of borrowing has increased and lenders have become more risk averse. As a consequence, in order to secure funding, business owners are highly likely to face a request for a personal guarantee, as a form of security for the lender.

That’s not the only problem though. Business owners need to go into this kind of agreement with their eyes wide open yet our survey identified a worrying lack of awareness of what it means to be a personal guarantor and the personal risks this can entail. Indeed, just 33% of business owners answered correctly that a personal guarantee is when the personal assets of the director or directors of a business are used to settle a loan if the firm defaults on payments.

It's also important to understand that if the business owner co-owns their home, with a spouse or partner – they will also have to sign the guarantee, and if the personal assets aren’t sufficient to cover the debt, the business owner could find themselves facing bankruptcy.

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There are ways to mitigate the risks however and it is vital business owners are aware of these options before they start looking around at funding solutions. Knowing how the risks of personal guarantees can be cut may not only make the decision to sign one far less stressful but it could also open up funding options that may have been disregarded on the basis of a personal guarantee requirement.

Personal Guarantee Insurance (PGI) is perhaps one of the most effective ways of mitigating the risks.

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. PGI is therefore becoming a key ally for many small business owners at a time when signing a personal guarantee has become quite a perilous decision. At Purbeck, we saw a 123% year on year increase in PGI secured in Q3 2022.

Personal Guarantee Insurance also does a lot more than pay out following a claim. Policyholders are offered access to free mentoring and support services if the business gets into financial distress, plus the huge benefit of expert guidance at the point the debt needs to be settled.

While around a third of small firms are looking for extra financial support based on our survey and 52% are focused on keeping on an even keel, 38% are planning for growth in 2023. Few businesses grow without taking risks and signing a personal guarantee is often the only way to secure the finance needed to make growth possible.

Being prepared and willing to sign a personal guarantee can widen options and improve access to finance but business owners must only sign that guarantee knowing full well the risks that come with that decision and most importantly, how to mitigate them.

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