Latest research is suggesting that the use of a Directors personal guarantee is on the rise in the UK.
There has been a rise in The difficulty small business owners are experiencing accessing funding without having to sign a Directors personal guarantee has become clear according new analysis by Purbeck Insurance.
The company say that October 2023 saw the largest number of small business owners ever recorded, taking insurance to mitigate the risk of signing a Directors personal guarantee as a condition of a business loan.
The research says that high street banks have reduced their funding appetite, SMEs are turning to the alternative lending market where directors personal guarantees are a common requirement for unsecured loans.
Business owners turning to Directors personal guarantee insurance
The analysis shows that in October 2023, there was a 60% rise in small business owners taking Directors personal guarantee insurance (PGI), to protect their personal assets should their business fail, following a new business loan that had a Directors personal guarantee attached.
Todd Davison, MD of Purbeck Personal Guarantee Insurance said “In the six years we have been in operation, we have never seen the demand we are experiencing now for protection against the risk of signing a personal guarantee. While some of this can be explained by increased awareness of PGI, it also demonstrates how challenging it has become for small business owners to secure business loans via traditional routes. We know most small businesses are seeking finance simply to keep their heads above water as working capital remains the top reason for new loans – 47% of applications were for this purpose, up from 37% in Q3 2022.”
“As the routes to funding narrow, it is vital small business owners seek advice and support from a commercial finance broker. Taking on longer term finance to pay short term creditor obligations could create a spiral of debt and ultimately lead to further business insolvencies.”
What is a Directors personal guarantee?
A Directors personal guarantee (DPG) is a legally binding agreement whereby individuals agree to take the financial responsibility for a business loan. When the business defaults on payments, their personal assets can be used as collateral in order to repay the debt.
This type of guarantee is normally required when applying for loans from traditional lenders or those that do not have an established credit history with the lender.
In some cases, a Directors personal guarantee may be required even if the business can prove that it has sufficient cash flow or assets to cover the loan. This is because lenders tend to view loans backed by personal guarantees as having less risk than those without them.
Although DPGs can be helpful for businesses looking to secure financing, there are also risks associated with them. For example, if the business is unable to pay back the loan, then the lender may demand full payment from the guarantor. This could put their personal assets at risk and potentially cause significant financial hardship.
It’s important to understand all of the implications before taking on a Directors Personal Guarantee so that you can determine whether or not it’s the right decision for your business.
Additionally, there are limits to the amount of liability a company director can assume through a DPG. It is important for businesses to confirm these limits with their lender before taking out a loan. In some cases, lenders may require more than one individual to sign a Directors Personal Guarantee in order to spread risk across the board.
When taking out a loan, businesses should also consider alternatives to a DPG such as insurance or another form of security. These may provide some protection from personal liability and still allow you to get access to the funds you need.
Ultimately, it’s important to understand all of your options before making any decisions about lending agreements and business finance.
Can the recovery of a Directors personal guarantee be enforced?
Yes, recovery of a Directors Personal Guarantee can be enforced by the lender. If you fail to make payments on time, the lender has the right to recover any money that has been lent from your personal assets.
Depending on the terms of the loan and Directors Personal Guarantee agreement, this could include anything from selling property or freezing accounts. Therefore, it is important for directors to fully understand the implications of a Directors Personal Guarantee before agreeing to one.
It is also necessary for directors to seek legal advice if they are uncertain about any aspect of a personal guarantee agreement.
It is important to note that there are alternatives to signing a Directors Personal Guarantee, such as incorporating your business or using other forms of commercial finance that may provide some protection.
It is always advisable to explore all of the options available to you before signing a personal guarantee as this could have a significant impact on your personal financial security.
Furthermore, it is important for directors to be aware that they can still be held liable if their business fails and the terms of the Directors Personal Guarantee are not met or fulfilled.
For further information about Directors Personal Guarantees, please speak to a specialist legal advisor who can provide you with tailored advice. They will be able to discuss the options available and explain any potential risks associated with signing such an agreement.
Furthermore, they may be able to provide you with guidance on how best to protect your personal assets should the business experience financial difficulties in the future.