Total Business Magazine

When Financing Your Firm Gets Personal

If you run a business, you know about risk taking.

Todd Davison, Director of Purbeck Insurance Services talks about the personal risks SME owners take for the sake of their business, touching on some of the benefits of Personal Guarantees.

The personal risk the owners of SMEs take to get their business started, to keep it going or to expand may go with the territory but also to a large extent goes unnoticed and unappreciated by the staff they employ. That’s just how it is running a business. Nevertheless, it can be lonely at the top and can seem even more so when financial pressures start to tighten.

Managing cashflow is one of the hardest aspects of running a business and close to a third of SME owners and directors (29%)[i] have found that this burden has worsened over the last year, according to a survey we conducted of over 500 SME owners and directors. But ‘Keep calm and carry on’ has become the mantra for many small firms during this period of deep uncertainty with SME optimism still relatively high.

We found that 38% of SMEs owners are planning for growth this year. In particular those operating in Sales and Marketing are the most optimistic, with 56% of SME leaders who responded to our survey planning for growth. If you work in Travel and Transport, Finance and IT & Telecoms you also count amongst the sectors with the most positive outlook based on our survey. Added to this, nearly half of the SMEs surveyed (47%) are looking at keeping their business on an even keel. Encouragingly, less than 10% of the directors we surveyed said they are looking to downscale or sell up.

The Purbeck research also reveals that some regions are more optimistic than others. Nearly half (47%) of SMEs in the South West top the chart for growth plans, followed by Yorkshire and the Humber and the East of England at 42%.

Growth often requires fresh investment but even standing still might require a boost in finances to cope with cashflow problems.

For many SME business owners and directors, accessing finance to support the business is one of the more challenging aspects of running a firm. As most commercial funding needs a Personal Guarantee, SME directors need to fully acquaint themselves with the terms of a Personal Guarantee backed loan, before signing on the dotted line. It’s not a commitment that should be taken lightly given the potential risk to their personal assets such as their home and or life savings.

Seeking independent advice is vital as is investigating what alternative funding may be available. If a Personal Guarantee backed business loan is the right solution, make sure you are comfortable with all the terms of the Guarantee and have contractual clarity on all eventualities. Be as objective as you can about the financial prospects of your business and its commercial value. A Personal Guarantee is not a hypothetical assurance, creditors can and will enforce them.

There’s no denying that Personal Guarantees can cause enormous stress because they significantly increase the personal financial risk for the individuals concerned. It’s therefore worth considering Personal Guarantee Insurance – a relatively new insurance cover available to the owners and directors of businesses which operate within a limited company structure. This offers protection against the risk that the Guarantee is called in by a lender.

The insurance will offset any outstanding obligations called in under a Personal Guarantee with the level of cover based on a fixed percentage of the Personal Guarantee the company director wishes to insure. This will be dependent on whether the corresponding finance facility is secured or unsecured.

The Brexit ‘impasse’ has demonstrated that even the most solid businesses face risks they have little control over – and there are still many unknowns in relation to Brexit. When a business with a commercial loan experiences financial trouble it is often the company directors who have provided security in the form of a Personal Guarantee who have most to lose – both on a financial and personal level.

The Brexit ‘impasse’ has demonstrated that even the most solid businesses face risks they have little control over – and there are still many unknowns in relation to Brexit.

Directors should not be afraid to seek professional advice if they feel outside their comfort zone; many advisors are there to help SMEs make informed decisions to work towards their strategic aspirations. In addition, part and parcel of Personal Guarantee Insurance is valuable business support to help businesses ride through difficult trading periods. This type of support enables firms to think through their options objectively, with introductions where appropriate to finance brokers, capital allowances experts and businesses operating in the same space for advice on best practices.

If you thought insurance was just there for the claim, think again. The owners and directors of the UK’s SMEs do have options to reduce their risks whilst working to achieve their business vision – even if it’s simply to maintain a holding pattern while we wait for a Brexit resolution.

Purbeck’s top facts to check before signing a personal guarantee for a business loan:

  • How will the lender enforce the guarantee?
  • Can the lender serve notice or seek payment on demand?
  • What exactly constitutes a default?
  • Do the terms allow for any remedy period upon default?
  • How will your net personal assets be assessed prior to the giving of the guarantee, and is this is likely to change?
  • Does the contract state that the lender must exhaust every other avenue before making demands on you?
  • Have you considered the cost of obtaining Personal Guarantee Insurance?

[i] 500 SMEs surveyed by Censuswide, March 2019

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