Borrowing to grow shouldn’t mean putting your house on the line, yet for a lot of business owners, that’s exactly what happens when they apply for finance.
The Federation of Small Businesses recently found that six in ten limited company directors would borrow to grow if they didn’t have to risk personal assets like their savings or their home. But when a personal guarantee is involved, only 13% are prepared to go ahead.
It’s now standard practice – almost eight in ten directors applying for finance are asked to sign one, and around a quarter walk away as a result. Others sign because they feel they have no choice.
For me, that’s where the problem starts.
Too many people don’t understand what they’re signing. I’ve seen directors take out what they believe to be an unsecured business loan, thinking that means there’s no personal risk attached. But most of the time, it’s the opposite. If things go wrong, that unsecured loan can come straight back to them.
A personal guarantee is just that – personal. It gives the lender the right to pursue the director’s own assets if the business can’t repay the debt. I’ve never liked it. It’s a personal commitment that can weigh heavily, and it’s often agreed to without proper advice.
At Able, we see it all the time – businesses that have been pressured to sign guarantees when other routes might have been available. Sometimes we can step in and restructure the funding to remove or limit the guarantee. Other times, we help directors protect themselves with personal guarantee insurance or other cover, so they at least have a safety net.
Guarantees have their place, but they should be a last resort. Used too freely, they discourage growth and stop businesses from taking opportunities.
But it’s also a double-edged sword. Lenders will always say that if a director isn’t prepared to share some of the risk, why should they? From their perspective, a personal guarantee shows commitment and confidence. In some cases, it can even make the difference between a deal being approved or declined – or can lead to a cheaper rate because the perceived risk is lower.
Our role at Able is about managing expectations on both sides. We’re here to balance the lender’s need for security with the business owner’s need for protection and flexibility.
The FSB found that one in seven directors who signed a guarantee became more cautious afterwards, delaying investment until the debt was cleared. It’s easy to see why – when your home’s at risk, you think twice about every decision.
I spoke to a business owner last week who wanted a £3 million facility to fund acquisitions. It was his first deal, and he didn’t think a personal guarantee should be required. The reality is, when the risk potential is that high and there’s no track record of managing borrowed money, a guarantee is almost inevitable. Once you’ve proven you can look after a lender’s funds responsibly, that conversation changes – and facilities without a guarantee can become possible.
Every case is different. The type of business, what the funding is for, the level of competition in the market and the lender’s appetite for risk all play a part. It’s a constantly shifting landscape, and part of our job is to help clients understand where they stand in it.
The FSB has now called on the Financial Conduct Authority to review how personal guarantees are used. Right now, there’s a gap in regulation that means most limited company directors are left exposed, and that really needs to change. But change takes time, and in the meantime, it’s down to business owners, brokers and accountants to tread carefully.
If you’re being asked for a personal guarantee, make sure you understand exactly what you’re committing to. Ask questions and check if there are alternatives. And if you have to sign, make sure the risk is properly managed.
Our job as brokers is to make sure no one signs something they don’t fully understand – and to push back when guarantees are used as the easy option rather than the right one. Used properly, they can help get a deal done. Used carelessly, they can hold back a business for years.
