The end of the 90-day window when the FCA must outline its plan to address the Federation of Small Business’ 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.

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.

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 ‘straitjacket’ is being placed on business growth. Understandably, by placing a small business owner’s personal finance at risk, personal guarantees can place a lot of stress on a director and deter them from seeking finance. According to Purbeck, 13% of those surveyed had backed out of a loan as it had a personal guarantee attached.

Todd Davison (pictured), MD of Purbeck Personal Guarantee Insurance commented, “Business owners must be pragmatic. While it’s easy to empathise with the sentiment that personal guarantees should be banned on loans to small businesses, it is understandable that alternative lenders will need some assurance of repayment if the business fails.

“Fundamentally, small business owners need to understand the risk mitigation strategies they can take before signing a personal guarantee. These include sharing the guarantee with a co-director, guaranteeing part rather than the whole of the loan, or taking personal guarantee insurance. In fact, in our survey, 46% said they would be more likely to sign a personal guarantee if they had insurance to protect against the risk.

“Personal guarantees must be proportionate to the loan being advanced and appropriate for each case. 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.”