Financial crisis fear for small businesses when furlough scheme ends and access to loans gets tougher

Purbeck Insurance Services, provider of a Personal Guarantee Insurance solution, has welcomed the Job Retention Bonus but fears this will be too little too late for small businesses reaching the end of their cash reserves as the furlough scheme ends in October.

As small businesses bring staff back from furlough, Purbeck believes there will be a rising demand for loans to help pay wage bills but access to funding will increasingly depend on the business owner providing security in the form of a personal guarantee.

Todd Davison, MD of Purbeck Insurance Services said: “Lending to SMEs is going to be much more risk averse than they were prior to the pandemic. It is likely that new finance will be heavily dependent on a business owner’s willingness to sign a personal guarantee – effectively putting their personal assets on the line if the business fails.  After months of worry and uncertainty this is not what small businesses need.  However it is important business owners and directors understand that a personal guarantee doesn’t have to be a barrier to getting the finance they need.  Personal Guarantee Insurance can cut the risk, paying up to 80% of the outstanding loan amounts due if the business fails.”  

Purbeck has a growing customer base of small business owners across the UK and recently settled outstanding debts amounting to over £20,000 for an engineering design and toolmaking business based in Bristol. Unlike any other type of business insurance, the value of cover extends to mentoring and support services offered to customers in financial distress. 

Todd Davison, MD of Purbeck Insurance Services continues: “It is crucial firms seek expert advice regarding business loans from members of respected trade bodies such as NACFB or FIBA and investigate ways to mitigate the risks such as using Personal Guarantee Insurance.

“In addition to insurance, there are a range of measures business owners should consider to cut the personal risk they are taking.  Signing a Personal Guarantee is never a decision to be taken lightly but as long as you mitigate the risks it should not be an insurmountable barrier to securing new finance.”

Tips to Mitigate the Risks of Personal Guarantees

  1. Educate yourself about the risks, ask whether you can afford to take them and always seek legal and/or personal finance support – your accountant, solicitor or a finance broker are good sources of advice

  2. Work out a way that you are not solely carrying the liability – so split the Guarantee between your fellow directors

  3. Seek absolute clarity on where your responsibilities for the Guarantee begin and end – for example is the Guarantee loan specific or does it cover all future loans that the lender may provide?

  4. Negotiate a time limit for the Guarantee and a cap on the amount, but do remember interest and costs added to the debt can soon mount up

  5. If you’ve signed a Personal Guarantee for another business loan previously don’t forget that they are cumulative so you could be doubling the risk to your personal assets

  6. Ask that the lender seeks settlement from company’s assets before enforcing the Guarantee

  7. Confirm all points of agreement intention and expectation in writing with the lender.  This could be crucial if there comes a point when you’re trying to negotiate out of a personal Guarantee.

  8. Consider Personal Guarantee insurance.  This relatively new type of insurance offers protection against the risk that the Guarantee is called by a lender and will offset any outstanding obligations called in under a Personal Guarantee. The level of cover is based on a fixed percentage of the Personal Guarantee the company director wishes to insure and this is dependent on whether the corresponding finance facility is secured or unsecured.

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