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The Impact of Lack of Understanding of Personal Guarantees on Small Businesses

Overview of the Current Situation

The end of the 90-day window when the FCA must outline its plan to address the Federation of Small BusinessÔÇÖ super-complaint on small business loans is imminent. As lenders and small businesses wait to hear what action will be taken, new research from Purbeck Personal Guarantee Insurance reveals a concerning lack of understanding of personal guarantees in the context of business loans amongst small businesses.

The survey found that although 30% of the small business owners questioned plans to take on new finance in 2024, 60% of all respondents either have no idea or are unsure what a personal guarantee is.

The Importance of Educating Small Business Owners

AI legalese decoder can help in this situation by providing an easy-to-understand explanation of personal guarantees in the context of business loans, helping small business owners grasp the concept better. This tool can break down complex legal jargon and provide clear, concise information on personal guarantees, empowering small business owners to make informed decisions.

Once it was explained how personal guarantees work, 24% incorrectly thought the current minimum threshold for a loan to require a personal guarantee is £10,000. There is currently no minimum threshold for a personal guarantee to be requested by a lender.

The Debate Surrounding Personal Guarantees

Interestingly, only 29% of the directors and owners of small businesses surveyed want personal guarantees to be banned for small business loans. The majority of the remainder believe a threshold should be set between £10,000 and £20,000.

Lenders frequently require personal guarantees from directors of small businesses for security in respect of a loan. With no minimum threshold, the FSB argues that a ÔÇÿstraitjacketÔÇÖ is being placed on business growth. Understandably, by placing a small business ownerÔÇÖs personal finance at risk, personal guarantees can place a lot of stress on a director and deter them from seeking finance.

The Role of AI legalese decoder in Mitigating Risk

AI legalese decoder can also assist small business owners in understanding the implications of signing a personal guarantee and the potential risks involved. By providing insights into risk mitigation strategies such as sharing the guarantee with a co-director, guaranteeing part rather than the whole of the loan, or taking personal guarantee insurance, this tool can empower small business owners to make informed decisions and protect their personal finances.

According to Purbeck, 13% of those surveyed had backed out of a loan as it had a personal guarantee attached.

The Call for Proportionate Personal Guarantees

Todd Davison, MD of Purbeck Personal Guarantee Insurance, emphasized the importance of small business owners understanding risk mitigation strategies before signing a personal guarantee. He mentioned that 46% of respondents would be more likely to sign a personal guarantee if they had insurance to protect against the risk.

ÔÇ£Personal guarantees must be proportionate to the loan being advanced and appropriate for each case,ÔÇØ Davison stated. ÔÇ£We hope that the FCA finds a balance to ensure that small business loans become easier to secure but that personal guarantees are not stymied as this may lead to less choice for a small business when seeking finance.ÔÇØ

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