Small Business Owners Struggle with Personal Guarantees for Business Loans
Small business owners are facing challenges when it comes to securing loans for their businesses, as banks are increasingly requiring them to provide personal guarantees. This practice has been described as a “straitjacket” on business growth by the Federation of Small Businesses (FSB), prompting them to issue a super-complaint to the Financial Conduct Authority (FCA) to address the issue.
Personal guarantees involve entrepreneurs putting their personal assets, such as their homes, at risk when taking out finance for their businesses. This can be a major obstacle for business growth, as it limits the ability of small business owners to make bold decisions and pursue new opportunities.
According to a survey by Purbeck Personal Guarantee Insurance, around 45% of business owners back away from finance if a personal guarantee is required. This reluctance to take on additional risk can hinder the growth and productivity of small businesses, ultimately impacting the economy as a whole.
Currently, the FCA does not have the authority to intervene in these lending decisions, as they fall outside of their regulatory scope. The FSB is advocating for a change in regulations to protect small business owners from the burden of personal guarantees.
Personal guarantees are often attached to loans taken out by limited companies and guaranteed by their directors, undermining the concept of limited liability. This puts additional pressure on entrepreneurs and can deter them from seeking external funding to support their business growth.
Martin McTague, national chairman of the FSB, highlights the challenges faced by entrepreneurs who are seeking to expand their businesses but are held back by the requirement of personal guarantees. He emphasizes the need for regulatory changes to support small business growth and economic development.
Understanding Personal Guarantees in Business Loans
A recent study has found that many small business owners lack a fundamental understanding of loan conditions, particularly when it comes to personal guarantees. This points to the need for greater education and transparency in lending practices to support the growth and success of small businesses.