Risk & Economy » Brexit » Brexit prompts SME owners to protect their personal assets 

Brexit prompts SME owners to protect their personal assets 

Business owners need to insure against the risks of taking out personal guarantee-backed loans, says Todd Davison, director, Purbeck Insurance Services.

Predictions have emerged of an upsurge in borrowing demand from SMEs if a ‘no deal’ Brexit occurs So it’s vital that the directors and owners of SMEs fully acquaint themselves with the terms of a personal guarantee backed loan, before signing on the dotted line.

Those who already have a personal guarantee backed loan or are considering an application for a new finance deal should also consider insurance against the risk of a personal guarantee being called in by their lender.  A recent report by the British Business Bank suggests half of small business owners have put their homes and savings on the line to secure a loan for their business.

There’s little doubt that Brexit is breeding uncertainty amongst businesses.  Added to this, there has been criticism levelled at The Treasury who, it has been reported, has ignored requests from banks to provide support to SMEs.

The main concern is that day to day running costs will rise.  For example material costs may go up, firms employing migrant workers may find their wage bills increasing as this resource becomes more scarce and businesses who have chosen to stockpile goods maybe facing increased warehousing costs.  All these factors impact cash flow and the basic ability to keep a business functioning.

The natural conclusion is that this may prompt an increase in demand for loans as firms look to introduce additional working capital buffers in a bid to ride out the storm.

Concerns have also been raised that a ‘bad’ Brexit could trigger a rise in loan defaults.  Based on the British Business Bank report, 62% of SMEs sought external funding in the past 3 years and 73% of these finance agreements required some kind of security – with a director backed personal guarantee the most common requirement. If loan defaults do increase, a torrid time could be on the cards for many of the UK’s directors and owners of SMEs.

Mitigating risks

While signing a personal guarantee may seem like Hobson’s Choice, there are steps business owners and directors can take to mitigate the risks.  That starts by making sure you’re armed with all the facts and potential risks.  Ensure you are clear on the terms of the guarantee, and have contractual clarity on all eventualities. Be as genuinely objective about the financial prospects of the business and its commercial value too.

Signing a personal guarantee significantly increases the chances of securing a loan but it may be possible to negotiate the percentage of the loan you should guarantee.  Also investigate whether you can insure yourself against that risk using personal guarantee insurance to keep your personal assets safe in the future.

Go into a new director backed personal guarantee with your eyes wide open.  No matter how optimistic you are about the future prospects for your business when you sign a personal guarantee, a whole host of factors can scupper your plans, from the economy and late payment to Brexit.

If things do go wrong and a claim is made under the guarantee, you and any other guarantors will be liable to pay the company’s debt and all your personal assets will potentially be on the line.  Worst case scenario is bankruptcy which will not only adversely affect your credit rating, you won’t be able to act as a company director without court permission.

A minority stake holding won’t necessarily protect you either as the whole amount can be claimed from one guarantor and the lender will pursue whoever they believe is most likely to settle the debt.

These are real risks, but if you do decide to go ahead and sign the guarantee they can be cut significantly by taking out insurance which incrementally mitigates against potential financial loss over a three year period – up to 80% of the cost of the debt.  Some finance brokers are now insisting small business owners should take out insurance as a condition of negotiating funding.  This niche insurance also helps to establish a more even balance of liabilities among directors.

Top facts to check before signing a personal guarantee for a business loan:

  • How will the lender enforce the guarantee?
  • Can the lender serve notice or seek payment on demand?
  • What exactly constitutes a default?
  • Do the terms allow for any remedy period upon default?
  • How will your net personal assets be assessed prior to the giving of the guarantee, and is this is likely to change?
  • Does the contract state that the lender must exhaust every other avenue before making demands on you?
  • Have you considered the cost of obtaining personal guarantee insurance?

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