One in Three SME Loans Put Owners’ Homes On The Line

Across the UK, small and medium enterprise (SME) owners, the driving forces behind the economy, are taking huge personal financial risks to keep their businesses afloat.

New research by Purbeck Insurance Services shows that 1 in 3 business loans now need a personal guarantee, meaning founders are basically betting their personal assets, often their homes, simply to secure capital.

With 36% of these loans being used just to help businesses operate as normal, industry leaders are lobbying for Rachel Reeves to avoid any measures that would push up those operating costs even more, increasing the burden on founders who already have personal assets on the line.

Early-Stage Founders Hit The Hardest

The study also found that the average personal-guarantee backed loan has grown to nearly £180,000 – a 16% increase year on year. In young businesses under two years old, the average loan value has risen 52% to £165k in the past year.

For founders with limited savings and cash flow that goes up and down, the loan they need to take out just to keep the business running comes with a huge personal gamble.

“Personal guarantees are now a structural feature of SME lending. When a loan is primarily to keep a business ticking over, the director who has given that guarantee faces heightened risk—especially as the cost of doing business continues to rise.” says Todd Davison, Managing Director of Purbeck Insurance Services

SMEs Taking On All The Risk

The UK’s 5.5 million SMEs really are the backbone of the UK economy, employing 16.6 million people and generating £2.8 trillion in turnover. The problem is more needs to be done to help protect them financially, especially as they continue to take on big financial risks.

Increasingly, more and more lenders are asking for a form of personal guarantee when a loan is taken out. The Federation of Small Businesses (FSB) is already warning that this is leading to a reduction in growth, with many companies refusing to take out loans for fear of personal losses.

All Risk, No Understanding

But whilst the stat that so many SMEs are taking on personal risks is worrying, even more worrying is the fact that many don’t know what they are signing up for.

According to research by Reparo Finance, 12% of business owners believed a personal guarantee simply meant certifying they had provided accurate information in a loan application.

A higher 14% thought it meant they understood the loan’s terms and 18% believed it was just a guarantee that they would pay back the loan.

The issue is that signing a personal guarantee means owners are putting their own finances on the line, not just those of the business, meaning they are taking on huge risks without a real understanding around what it means.

And it’s definitely something to take seriously. Worryingly, 11% of business owners believe lenders wouldn’t enforce a personal guarantee if the company goes under. The problem? They will, and they do.

So, What Needs To Change?

When it comes to taking out personal loans to fuel their businesses, a lot needs to be done to protect founders.

First and foremost, more needs to be done to help founders understand what personal guarantees actually mean. Only then will they truly understand the level of risk they are taking on.

More importantly however, is the need for the government to do more to make running a business more affordable. With high employment costs as well as growing inflation for services and materials, founders that are already taking on a lot of risk are faced with even more financial uncertainty.

As the Autumn Budget approaches, SME business owners will be looking to see how Rachel Reeves can provide some relief. Ultimately the question becomes: do we want founders to build companies? and if so, are we comfortable with them betting their houses on them?