With the general election just weeks away, the fight for the small business vote has begun. Along with tax reforms and a clampdown on late payers, pledges already made by Labour focus on funding and improved banking services for small businesses. The Federation of Small Businesses (FSB) has launched its own manifesto  and again, access to finance is a major aim, including closing loopholes in protections for those giving personal guarantees.
So just how fundamental is the dreaded personal guarantee to small business funding? Furthermore, given companies founded solely by women garnered just 1.6% of the total capital invested in venture-backed startups in Europe last year, there seems a prime opportunity for a new Government to close to the gender funding gap.
Personal Guarantees Under Inspection
The Financial Conduct Authority (FCA) is currently gathering evidence in response to a super-complaint made by the FSB, that excessive requirements for personal guarantees from small business owners are putting a ‘straitjacket’ on business growth.
Our own research has found that 13% of small firms back off from a finance deal if they find there is a personal guarantee involved. Yet, fundamentally, personal guarantees exist to protect lenders, and are part and parcel of the lending landscape, especially for attracting finance from alternative lenders. If personal guarantees are proportionate and appropriate to the loan amount, they can be significant facilitators to accessing finance for SMEs to help drive growth in the UK economy.
By teaching business owners about how to mitigate the risk of becoming a personal guarantor as detailed in our White Paper – Bitter Pill or Acceptable Risk Bitter pill or acceptable risk: The Role of Personal Guarantees in the SME Lending space, small business owners can sign on the dotted line with a greater level of confidence. Along with securing personal guarantee insurance and seeking professional advice from a commercial finance broker, small business owners can consider sharing the guarantee with a business partner; working out with the lender a time limit for the guarantee; or agreeing to guarantee just part of the loan. These are all useful strategies to manage the risk.
Closing the gender funding gap
Where gender equality in financing is concerned, research by Purbeck Insurance Services shows that just 11% of Personal Guarantee Insurance (PGI) policies for business loans were taken out by women last year. In fact, in 2023, the total value of loans supported by Personal Guarantee Insurance (PGI) was over £379 million, but only 5% of that value—amounting to £20 million—was allocated to female founders.
The number of new businesses incorporated by female founders reached a record high in 2023, nevertheless, women’s success at attracting finance is not keeping pace with this growth.
Again there needs to be better awareness of loan risk mitigation strategies to improve funding options and provide greater confidence to female business founders to grow their ventures.
No matter who is voted into power next month, keeping the doors of funding open to SMEs which employ 60% of the UK’s private sector workforce, is critical.
Todd Davison, MD, Purbeck Insurance Services