Don’t let business finances harm your mental health

Todd Davison, MD of Purbeck Personal Guarantee Insurance

It was mental health awareness week recently and to mark the week, Purbeck Personal Guarantee Insurance conducted a survey amongst small business owners to find out how much their mental well-being has been impacted by the host of cost challenges they have faced. Financial worries rest heavily on the shoulders of business owners and this year has been particularly tough for many smaller businesses still recovering from the impact of the pandemic.  

Half of all small business owners burdened by business finance worries

In our survey, 49% of small business owners feel the financial aspect of running their business has negatively impacted their mental health in the past year.  Managing the finances comes with the territory for most small business owners who cannot afford to employ a dedicated Finance Director but it is shocking to find that the directors of almost half of all small businesses could be suffering mental health problems.

60% have taken on personal debt for their business

Amongst the small business directors and owners we surveyed who feel the financial aspect of running their business has impacted their mental health, 60% have taken on personal debt for their business while 69% have taken on or will need new finance in the next year. For close to half (43%) this will be for paying off outstanding debt. Furthermore, 65% are already personal guarantors or plan to become one for a business loan.  This means that unless they have secured personal guarantee insurance, their home and savings would be at risk if their business fails.

It’s not necessarily new or less experienced owner/managers who are suffering the most detriment to their mental health.  In fact, the owners of businesses that have been established for 5-10 years, employ 2 to 10 people and are solely responsible for the decisions of the business are most likely to have suffered higher levels of anxiety and stress over their business finances, according to the survey.

All the wrong ingredients

We’ve had all the ingredients in the past year to increase stress levels for small business owners, as reflected in our survey. Often, the finances of a small business are linked to the personal finances of the owner – whether that’s because they have taken on a personal loan to help the business, borrowed from friends or family or they have signed a personal guarantee for a business loan. That just adds to the worry, creating a huge burden for the owner/manager.

Alleviate the risks of personal guarantees

To help alleviate this worry, before deciding to sign a personal guarantee business owners should get some independent advice.  An accountant, solicitor or commercial broker 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.  The business owner can also look at how the guarantee could be shared amongst co-directors so that risk it not being shouldered by just one person.

It may be possible to 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 currently rising and costs added to the debt can soon mount up.  It may also be an option to guarantee part of the loan meaning that settlement of the debt is sought first from the company’s assets before enforcing the guarantee.  

Personal Guarantee Insurance

Personal Guarantee Insurance can also 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 and this will depend on whether the corresponding finance facility is secured or unsecured.  Policyholders are also offered access to free mentoring and support services if the business gets into financial distress, plus expert guidance at the point the debt needs to be settled.  

Applications for Personal Guarantee Insurance Double

Applications for personal guarantee insurance more than doubled in 2022 on the previous year with working capital as the top reason for new funding.  This huge rise underlines the personal risks many business owners have accepted in the past year to keep their businesses from insolvency.

In Q4 2022, most loans being taken out were between £75k and £100k in value but looking at the whole of 2022, the biggest year-on-year increase has been for much smaller loans from £25k-£50k in value, which jumped by 181%.

Tips for better mental health

Taking the steps described above can help reduce stress and anxiety on a practical level.  On a more emotional level it is also worth checking out the Mental Health Awareness website which offers some fantastic tips for dealing with anxiety which was the theme of this year’s Mental Health Awareness week.  Tips include breathing techniques; exercise (outdoors ideally); keeping a diary; eating healthily; getting rest and sleep; and connecting with others. 

Only connect

Connections are vital for small business owners, particularly at times of huge stress.  If nothing else, it can help reinforce that business owners are not alone in their fears and by connecting with other businesses, there is an opportunity to learn how others deal with cashflow challenges. We know the connections we have facilitated for small businesses as part of our claims service have often made a big difference to the mental well-being of the owner as well as the financial standing of the business.