Personal guarantees for loans stifling growth, say business owners

By Tim Adler on Small Business UK - Advice and Ideas for UK Small Businesses and SMEs

Small business owners say they are being straitjacketed by banks, having to take out personal guarantees for loans to growth their businesses.

Acting on their behalf, the Federation of Small Businesses (FSB) has issued a super-complaint to the Financial Conduct Authority (FCA) to highlight the harsh lending practices of banks that excessively demand personal guarantees for business loans.

Personal guarantees can be a “straitjacket” on business growth, forcing entrepreneurs to put their homes or other assets at risk when taking out finance.

What is a personal guarantee on a business loan? – A significant portion of business lending is through unsecured loans – these often require a personal guarantee. This article looks at what they actually are and their pros and cons

In some cases, small business owners take out insurance against having to use the personal guarantee, adding to the cost of the loan.

Personal guarantees can be particularly paralysing when they are applied to small loans – leaving many business owners more likely to abandon business growth plans or push them into being over-cautious in their decision-making, deterred from making bold choices, argues the FSB.

Around 45 per cent of business owners back away from finance if a personal guarantee is attached, according to a May 2021 Purbeck Personal Guarantee Insurance survey.

Currently, the FCA cannot get involved in these type of lending decisions, which are outside of its remit. The FSB wants this to change.

A limited company is meant to limit the liability of company directors, but personal guarantees most often apply to loans taken out by companies and guaranteed by their directors – corrupting the concept of limited liability.

Martin McTague, national chairman of the FSB, said: “Put yourself in the shoes of an entrepreneur who’s created a promising business and is keen to grow. You approach your bank for a small loan, but they say you can only have the money if you sign a personal guarantee which would ultimately put your family home or other assets at risk. This is a straitjacket on small business growth.

“It is no wonder that many small business owners in that position are telling us they are choosing to avoid external funding which they could be using to capitalise on new opportunities.

“It’s bad news for the individual business – and, zooming out, it’s bad news for the economy as a whole, at a time when we’re looking for economic growth and productivity gains.”

More on personal guarantees

SMEs don’t understand personal guarantee in business loans – There is a fundamental lack of understanding regarding loan conditions from small business owners – specifically personal guarantees, a new study finds.

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