Changing how personal guarantees for business owners work has relieved the stress of small businesses enabling them to grow.
Since launch, Purbeck Personal Guarantee Insurance has protected over £120m in Personal Guarantees, giving business owners and directors the confidence to secure finance knowing that if the business fails, the majority of the loan would be paid off without risk to their home and assets.
MD Todd Davison, has grown the company to become, currently, the only insurer offering personal guarantee insurance to small business owners which can be purchased for an existing guarantee, or as finance is taken out. He shares his insights with Business Matters
What type of businesses do you work with?
We provide personal guarantee insurance to the owners or directors of any incorporated business that fits our risk appetite. It can be a start-up or a well-established business but typically it is small to medium sized firms who haven’t built the financial standing to support their growth ambitions so the directors or owners need to use their personal assets as security for the lender.
What problem does your company solve?
SME access to finance is increasingly going to necessitate signing a Personal Guarantee as lenders become more risk averse following the pandemic.
At the same time, the risk of signing a Personal Guarantee has increased following new insolvency rules introduced in December 2020 which made HMRC a preferred creditor in a business insolvency. In essence this may reduce the ‘pot’ of funds left to pay existing Personal Guarantee backed loans meaning that a director or business owner could find that as the loan is called in, their personal assets need to be used to settle the debt.
It is therefore crucial SME owners and directors understand how they can mitigate the risks of signing a Personal Guarantee, with Personal Guarantee Insurance becoming an increasingly common option.
Personal Guarantees give the lender a written promise, made by a director or number of directors, to accept liability for a company’s debt. In practice, this means that if the business defaults on a loan the director’s home, car and anything in their personal bank account could be called on to settle the outstanding debt. The guarantor could even face bankruptcy if their personal assets don’t cover the debt. This obviously has much longer-term ramifications, including prohibiting them from being a company director in the future.
If you co-own your home, with a spouse or partner – they will also have to sign the guarantee. A minority stake holding in the business won’t protect you either as a lender will go after whoever has the most chance of settling the debt.
Personal Guarantees can apply to a wide range of loan facilities including those available from P2P lending platforms – in fact at Purbeck we see most of the demand for Personal Guarantee Insurance coming from the alternative finance market. In addition, the Government backed CBILS (Coronavirus Business Interruption Loan Scheme) permitted the use of Personal Guarantees as security for loans over £250,000.
Signing a Personal Guarantee to secure access to funding is a risk some small business owners are willing to take while others see it as a step too far. In a survey we conducted amongst SME owners and directors, almost half (45%) said they’d decided against taking out a loan because of a Personal Guarantee.
What is your USP?
Purbeck Personal Guarantee Insurance is the only provider of personal guarantee insurance in the UK. Not only that but unlike other types of business insurance, we do all that we can to support our customers to prevent their business failing and a claim from occurring. We offer mentoring, advice and access to re-financing experts. In some cases we can also put businesses in touch with other firms in the same field to learn how they have dealt with similar challenges.
Our underwriters also review each application on its own individual merits; there is no one size fits all as we recognise the SME space is broad and diverse.
What are your company values? Have you ever had them challenged and if so how have you dealt with it?
Building and preserving our reputation as a professional, personable and market leading organisation is fundamental. We are proud to score 4.9 out of 5 on Trustpilot for service excellence. To this end our values are focused on investing in the professional development of our people, ensuring we are fleet of foot operationally and deliver long term, sustainable financial value to our shareholders.
I am delighted to say we have never had our values challenged.
How do you ensure that you recruit a team that reflects your company values?
We undertake a values-based assessment for new recruits to ensure they align to the core values of our business. Also, where we can, before hiring we also invite a candidate to meet the team both in the office and outside of work to ensure the alignment of values works for both the candidate and the team.
Are you happy to offer a hybrid working model of home/office, post-covid?
Yes – the key to getting this right is clear communication and being able to build that team spirit and culture.
Do you have any tips for managing suppliers and customers effectively?
Being proactive is vital – constantly assess any impact to the supply chain and anticipate any disruption to supplies. If customers are struggling to meet contractual obligations consider what impact would this have on your business? It is important to work out a clear strategy to deal with late or non-payment – that might be through credit control, taking legal advice, limiting credit terms or a combination of all three.
Any finance or cash-flow tips for new businesses starting out?
Careful financial forecasting is essential to establish businesses needs and whether any additional funding is required to create, sustain and grow the business.
We know many SMEs don’t have the luxury of a Financial Director so the services of an accountant should be called upon if the financial expertise isn’t in-house.
The next thing you need to do is get a firm grasp on the finance options available to your business. If you’re a start-up, you need to be aware that you probably won’t be able to get an unsecured business loan without some reasonably strict repayment terms.
So, you’ll typically have to pay more interest with unsecured loans. An unsecured business loan, then, is a viable option if you only need a small amount such as £20,000.
You also need to be aware that unsecured borrowing is almost always supported by a Personal Guarantee, and it’s common for lenders to ask for personal guarantees to act as security against a secured loan too.
If your business has been trading for a year, you’ll naturally be in a stronger position than you were 12 months ago, as you’ll be able show potential investors your cash flow.
Banks and alternative finance providers will want to see evidence of a strong cash flow, as it provides reassurance that your business can meet loan repayments. As well as showing cash flow for the previous year, create a three-year cash flow forecast – how you think your business will perform over the next 36 months – to underline your business’ capability to repay the loan.
Don’t expect the conversation with a lender to solely be about the financials. Lenders will also try to make your judgement of you as a director – they want to see if you know what’s happening in your industry, what trends are emerging, and the potential market threats and opportunities that could affect your business.
Carrying out a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of your business will show you’ve done your homework and you’re thinking about what’s required to future-proof your business.
You can’t do enough to show yourself as a competent and successful business owner – it’s as much about proving your personal credentials as it is the viability of your business.
To build a positive image of yourself as the business owner, obtain endorsements from people you’ve done business with in the past that you can carry into the meetings with the lender.
If you’re asked to sign a personal guarantee make it a priority to find out what signing that guarantee means for you personally, and if it is the only way you can realise the objective of financing a business, consider taking out insurance to cut the risk of financial loss.
Savvy entrepreneurs in the UK collectively secured £35m of funding for a new venture in the past three years through personal guarantee backed loans that were protected by Personal Guarantee insurance.
There are additional steps business owners should consider when they weigh up the pros and cons of signing a Personal Guarantee. For example, if you run your business with co-directors, come to an agreement to share the guarantee. You can also negotiate a time limit for the guarantee and a cap on the amount, but remember interest and costs added to the debt can soon mount up.
You may also be able to 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, without strong cash flow it is difficult for small businesses to reinvest and grow so being tough and having a robust approach to late payment could push your invoices higher up the pile and save the time and stress of chasing in the future.
If you could ask one thing of the government to change for businesses what would it be?
Not necessarily change but continue to encourage entrepreneurship in the UK by offering incentives, grants, mentoring programmes. SMEs are critical to the UK economy and it’s a boom time in the UK for new business creation – record numbers of small businesses have been established since the start of the pandemic and SMEs contribute more in turnover and employment than large businesses. They need as much support as possible.
Further incentives could work to hone in on late payment issues within supply chains to encourage the flow of capital. Key to this is understanding the inefficiencies within supply chains and to encourage the release of capital rather than suppliers waiting 90, 120 days to be paid.
What is your attitude towards your competitors?
Ask me again when we have one!
Any thoughts on the future of your company and your dreams?
Our strategy is to stick to niche, underserved markets and develop innovative insurance solutions. Our core product is growing well and we’ve seen quarter-on-quarter sales increase and the renewal book has performed well.
We have targeted a number of follow on products and distribution channels and our strategic roadmap has a number of compelling opportunities. Each product will be the first of their kind in the UK market which is exciting!
Expansion overseas is also another option but there are obvious challenges and there is plenty of opportunity within the UK.