Small businesses are increasingly turning to alternative financing options amid growing scrutiny over overreliance on personal guarantees for business loans, new data reveals.
In December 2023, the FSB (Federation of Small Businesses) lodged a super complaint with the FCA about lending practices, in particular in relation to the onerous requirement by many lenders for personal guarantees from individuals to support loans to SMEs. .
Wider industry concerns – including those from the House of Commons Treasury Committee, LSB (Lending Standards Board), as well as concerns from small business owners about this common requirement – are further highlighting the issue.
New ideas from Joe Morley, director of commercial finance at Financing options by Tiderevealed that many small business owners are not aware of all the financing solutions available (beyond traditional loans and credit cards) and many do not even know what a personal guarantee entails.
TO Personal guarantee refers to an individual’s promise to repay financing if his or her company is unable to do so. In other words, if the the company cannot pay the debt for any reason (liquidation, insolvency, etc.), the owner/director of the company will be held personally liable.
A personal payment guarantee minimizes the level of risk for the lender by providing an additional layer of protection; In most cases, the property is used as the primary asset in this collateral, so homes may be at risk if there is no other way to pay. Debt.
Morley said: “Here at Funding Options, our goal is to break down funding barriers for our clients. Our process helps business owners to understand their finances eligibility, depending on your specific circumstances and needs, and we provide businesses with certainty through pre-approved offers.
“The platform aims to connect business owners with the type of financing most suitable for their needs, not limit them only to traditional loans.
“Overall, knowledge and understanding of personal guarantees among our customers is good; However, some of our clients actively avoid options that require a personal guarantee (as they want to keep personal and business matters separate or do not want to take any risks against their personal situation). and in some cases they don’t fully understand the implications.”
Personal guarantees can be an attractive option: they could improve your chances of obtaining financing, they may be less expensive than other financing alternatives, obtaining financing can be positive and allows businesses to achieve their potential.
However, before becoming a commercial loan guarantor, you should know the legal foundations of the contractual relationship you are entering into and the prospects and consequences on your personal assets if the personal guarantee is foreclosed. For example, defaulting on a personally guaranteed loan can affect your personal credit score.
In the context of this super complaint, Morley added: “According to the FSB, the increasing demand for personal guarantees by lenders has detrimental impacts on business owners (including financial and emotional impacts) as well as the wider UK economy (impeding future business growth through through a possible decrease in credit demand and market distortions). .
“Although most of alternative loans will still require a personal guarantee; There are now an increasing number of options available on the market that do not require it; You will find some lender in every category (unsecured, active, MCA, invoice, etc.) who will offer a PG-free guarantee. option.
“There is an increasing range of funding avenues available to businesses in the UK, and many are designed specifically to meet the needs small business needs who face significant financial pressures and whose directors struggle to find the credit conditions they need.
“There are several types of unsecured financing available to business owners who prefer not to put up their valuable assets as collateral, including some other unsecured loan options, which in some cases involve asset financing, cash advance for merchantsand invoice financing.
“In addition to the constant demand for standard loans and credit card options, we have seen increased interest in alternative and unsecured lending options as a result of the current climate.
“In particular, merchant cash advances and income-based loans are among the fastest growing types of business loans we are seeing right now, but there is still much to be done to improve awareness of these by part of the clients. At the other end of the spectrum, we are seeing a decline in the use of overdrafts (outside banks).”