Special Features

Solving the image problem with personal guarantees

Todd Davison - Director of Purbeck Insurance Services
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15th April 2019
Todd Davison Purbeck
"The need for additional funding may start to outweigh the cautiousness some directors feel about signing a personal guarantee to secure new finance."

You need to be a very confident person to put up your personal estate as collateral when taking out a loan. Some business directors will sign a personal guarantee even if it makes them feel uncomfortable. For others, it’s deemed too much of a risk.

For commercial brokers, getting a client comfortable with the thought of signing a personal guarantee, even when the client understands it could improve their chances of accessing finance, is perhaps one of the trickier aspects of the job.

However, as we face another six months of Brexit uncertainty, the need for additional funding may start to outweigh the cautiousness some directors feel about signing a personal guarantee to secure new finance.

So, just how uneasy are directors about taking out a personal guarantee?

Last year, Purbeck Insurance Services, the UK’s only provider of personal guarantee insurance, conducted a survey among 250 business directors in the UK to find out their attitudes towards personal guarantees. Nearly half (44%) of the respondents said they had a personal guarantee in place – of those directors, a score of 4.2 (out of 10) was recorded for how comfortable they felt when signing their personal guarantee.

Meanwhile, the 56% of respondents who hadn’t signed a personal guarantee recorded a score of 2.2 (out of 10). It figures – these people were very uncomfortable about the prospect of potentially putting their personal assets at risk in order to borrow money for their business – and had clearly decided to use other means to access finance.

There is also a level of misunderstanding about personal guarantees

On the flip side, misconceptions about personal guarantees exist that could leave business owners blissfully unaware of the risks involved. In another survey carried out this year amongst SMEs just over 60 per cent of respondents didn’t realise the bank will be able to repossess the personal assets of business owners or directors if the loan is called in for payment.

Helping directors feel more comfortable

It’s in the interests of finance facilitators to make business directors feel both fully aware of the risks but also more relaxed about signing a personal guarantee. That may seem an impossible task - surely no amount of talking is going to help directors come away from a meeting feeling any better about the prospect of taking out a personal guarantee.

What’s needed is a risk-mitigating solution. When asked how they’d have felt if they could have had personal guarantee Insurance in place at the time of signing, the comfort-level score among those with existing agreements nearly doubled to 8.1.

When the same solution was put to respondents who hadn’t signed a personal guarantee, the feelings of comfort improved almost threefold.

What this means for lenders and brokers

If you require borrowers to sign a personal guarantee, the survey findings suggest directors are more likely to put their name on the dotted line if you’re able to introduce them to insurance to cover a percentage of the loan.

In other words, personal guarantee insurance can be a sales tool to help execute your client deals, enabling you to earn additional income; after all, it’s giving you a platform to have a financial discussion with directors who before wouldn’t have been prepared to consider such an agreement.

Available against a wide range of business loans, personal guarantee Insurance gives commercial finance brokers an opportunity to upsell without having to raise interest rates.

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