It’s a buzz running a small business, but as the founder of a rapidly growing enterprise, I have a fairly good idea of what can keep other small business owners awake at night. Money.
Whether it’s getting money in, paying it out or finding new sources of investment, managing finances can be a headache. So when business owners are faced with the challenge of finding extra cash quickly, where do they go?
Depending on the sum needed, family members can be easy ‘go to’ sources of funding but the downsides are obvious if all doesn’t quite go to plan. They say never mix business with pleasure. The same could apply to money and family.
We know from our own research that 29% of small businesses rely on an overdraft to help fund their business but these can be costly.
P2P lenders are proving to be a popular source of new finance for small businesses – in fact a good portion of small business owners taking personal guarantee insurance from Purbeck, have done so for a P2P loan with a personal guarantee attached. However, interest rates can rocket if a business defaults and some P2P lenders are now tightening their lending criteria to small firms. It’s also worth noting that the Financial Conduct Authority is introducing new rules to address concerns over business practices.[i]
Then there’s options such as asset finance, commercial mortgages, invoice financing, secured and un-secured loans to consider. And, in the lead up to Brexit, the government has been at pains to make clear that loan facilities are there for small businesses to utilise to keep business flowing, through its new SME Finance Charter
There’s no shortage of choice for small businesses when shopping for new finance, but depending on what stage your business is at, you could find the routes to business finance become quite limited if you are not willing to sign a personal guarantee. Many lenders will want a personal guarantee from a company owner or director when a business is young and without the level of assets needed to provide security for the loan.
The stark reality is that by signing a personal guarantee you will put your home, car and life savings on the line if your business fails. If you co-own your home, a spouse or partner may also have to sign the guarantee, essentially making them liable for the whole amount of the loan. If your personal assets fail to cover the debt, you may be made bankrupt.
None of us can predict the future and while your business profits might be healthy right now, all sorts of spanners can throw best laid plans into disarray. It’s perhaps not surprising that in a survey by Purbeck[iii], over 1 in 10 small business owners (12%) said they’d decided against taking out a business loan because it included a personal guarantee.
But do personal guarantees really deserve a bad rap? It is right to be cautious but there are ways you can seriously mitigate the risks.
The first step is to seek the independent advice of a financial adviser or commercial broker. They will work out what is right for your business and advise on the ways you can cut the personal risks you might face by signing a personal guarantee.
If you run your business with co-directors, come to an agreement to share the guarantee. In this way if you do default on the loan and the guarantee is called in – each of you will have less to lose. Just bear in mind that even if you have a minority stake holding in the business, the whole amount can be called from one guarantor and the lender will pursue whoever they believe is most likely to settle the debt.
Negotiate a time limit for the guarantee and a cap on the amount, but do remember interest and costs added to the debt can soon mount up. You can also agree terms where you are guaranteeing a part of rather than the whole loan and that settlement is sought first from company’s assets before enforcing the guarantee.
Finally, consider Personal Guarantee insurance. Just like any other insurance it protects against the risk of the worst happening – in this instance the risk that your business fails and the guarantee is called in by the lender. Insurance will offset any outstanding obligations called in with the level of cover based on a fixed percentage of the personal guarantee the company director wishes to insure. This is dependent on whether the corresponding finance facility is secured or unsecured.
Operating a small and rapidly growing business takes determination and a willingness to accept some level of risk but it doesn’t have to be a white-knuckle ride all the way. Taking measures to reduce the risk to your personal finances will give you a clearer focus on your business – and quite possibly a better night’s sleep.
[iii] Survey conducted by Censuswide on behalf of Purbeck of 500 small business owners and directors, March 2019