Many small-to-medium sized enterprise (SMEs) leaders take out loans to expand their operations. Traditional financial firms have historically been somewhat reluctant to lend to smaller businesses, due to the high risk involved. However, with the rise of digital technology, there are an increasing number of alternative finance sources for SMEs, making it easier than ever to secure a business loan.
Whether SMEs take out loans from banks or alternative finance providers, they are required to sign ‘personal guarantees.’ In these written agreements, business owners guarantee payment on a loan, should the company not pay. This can put SME leaders’ personal assets at risk. New figures indicate that most UK-based SME heads do not know what a personal guarantee is.
SME misunderstanding
These figures were gathered by Wirefund, a small business loan supplier. The firm questioned 510 senior SME decision-makers on the terms and conditions of business loans. They especially focused on personal guarantees, which are often buried in a loan agreement’s small print, to determine SME understanding of this common practice.
It was found that over half (55%) of those questioned do not know what personal guarantees are. Just over a fifth of respondents think that it only obligates a business head to repay a loan on time, to the best of their ability. Furthermore, 61% of SME leaders do not realise how far-reaching personal guarantees are, not comprehending that it can jeopardise their personal assets. A fifth of respondents did not think that personal guarantees ever required a business head’s private assets as collateral.
Outdated tools
This broad and deep misunderstanding of personal guarantees, has ensured they remain common practise among loan providers. A staggering 79% of respondents admitted that they had not been dissuaded from taking out a business loan, because it included a personal guarantee. Yet over half (55%) of these SME heads specifically do no not know what a personal guarantee is.
Concluding their report, it was said that personal guarantees are not fit for purpose their CEO, Amit Sankey, labelled personal guarantees opaque and outdated tools, which are misunderstood and misaligned with the requirements of UK-based businesses. Commenting further, Sankley noted:
“Our research shows very clearly that SME owners do not know what they are and are taking on huge, hidden risk as a result. We can do small business finance without personal guarantees and we should, because if enforced, they can have devastating effects. I have seen it first-hand. Business finance shouldn’t ruin lives, it should be building lives, businesses and communities.”
Protecting your finances
With this study, we see how important it is that you read the terms and conditions of loans, before you sign on the dotted line. Examine terms and conditions carefully, to ensure the loan does not put your livelihood at risk. You may also want to consider your business model carefully, before starting your firm. If you form a limited firm, you can lend your personal assets a greater measure of protection, helping insulate your livelihood from risk. As company registration agents, Turner Little can supply you with the company creation services you need to develop a financially-strong firm.
Turner Little
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agent, Registered Bank Intermediaries and Business Consultants, as well as Trust provider. You can receive our monthly newsletter by signing up using the form below.
