SMEs don’t understand personal guarantee in business loans

There is a fundamental lack of understanding regarding loan conditions from small business owners - specifically personal guarantees, a new study finds.

Four fifths of business owners are not put off by a loan that contain a personal guarantee

Four fifths of business owners are not put off by a loan that contain a personal guarantee

SMEs are signing up to livelihood threatening loan conditions, ignorantly, a report exposes today. The research by Wirefund, an SME loan provider, reveals that the majority of SME owners have no idea what a personal guarantee is, despite it being a requirement from banks and many alternative finance providers when lending to businesses.

Wirefund asked 510 senior SME decision makers questions relating to the terms and conditions of loans – specifically personal guarantees – to determine whether SMEs understood this very common practice, which is tucked away in the small print of most business loans.

The research paints a shocking picture: there is a broad and deep misunderstanding of what personal guarantees are and the impact they can have on the SME community.

More than half (55 per cent) of SME business owners do not know what a personal guarantee is, with 21 per cent believing it only means that business owners would pay money back on time to the best of their ability.

Nearly two thirds (61 per cent) do not realise how far-reaching the liabilities associated with personal guarantees are (in that they relate to personal assets, not just business assets).

Only 8 per cent realise how inescapable personal guarantees are and that high-street banks always require them, with 20 per cent thinking high street banks never or rarely require a director to put their own assets down as collateral.

Four fifths (79 per cent) stated they had not been put off a business loan because it included a personal guarantee. However, shockingly 55 per cent of those SME owners did not understand what a personal guarantee was.

The report highlights personal guarantees are not fit for purpose. Business loans are built on a dangerous, misunderstood practice. Not only is there a severe underestimation of personal risk among SME owners, but personal guarantees do not match the typical asset ownership of today’s entrepreneurs either.

Amit Sankey, CEO and founder of Wirefund commented thinks that personal guarantees are opaque and outdated tools, misunderstood and misaligned with the needs of British business.

Sankey concludes, ‘Our research shows very clearly that SME owners do not know what they are and are taking on huge, hidden risk as a result.

‘We can do small business finance without personal guarantees and we should, because if enforced, they can have devastating effects. I have seen it first-hand. Business finance shouldn’t ruin lives, it should be building lives, businesses and communities.’

Further reading on bank loans

Comments (0)