DEMAND for personal guarantee insurance on peer-to-peer business loans rose by 40 per cent in the first six months of 2019, compared to the previous six-month period, in a sign that business-owners are taking a more cautious approach to P2P financing.
According to analysis by Purbeck Insurance Services, the demand is being driven by small- and medium-sized enterprises (SMEs) who have secured finance from P2P lenders. The number of small businesses seeking personal guarantee insurance for unsecured loans rose by 58 per cent across the same period.
“It is good news that owners and directors of SMEs are taking action to mitigate the personal risk to their assets, but the sharp rise suggests small businesses are feeling skittish about P2P funding,” said Todd Davison, director, Purbeck Insurance Services.
“This might not be surprising. These lenders can provide speedy access to finance for firms, but as with any finance deal, caution is advised. Interest rates charged by some P2P lenders can soon rocket if a business defaults and we know some lenders are now tightening their lending criteria to small firms.
“There have also been a series of failures in the P2P lending world and the Financial Conduct Authority is set to introduce new rules for the P2P lending industry to address concerns over business practices.”
Davison warned SMEs that when a business fails to repay a loan from a P2P lender, the lender can take action against the company director personally under the terms of the personal guarantee. If the director does not have the means to repay the outstanding obligations, this can lead to bankruptcy.
“Small business are therefore advised to fully consider the implications of a borrowing from a P2P lender and should look to seek independent advice from their accountant, solicitor or finance broker,” Davison added.
Personal guarantees are often made in writing as a form of added security on business loans. It usually involves a written pledge from the director promising to personally cover the cost of a defaulted loan, or incomplete repayment.
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Personal guarantee insurance is a relatively new type of insurance for business owners and directors which will offset any obligations called in under a personal guarantee.
Purbeck has reported that enquiries into its personal guaranteed insurance policies jumped by 85 per cent in the first half of 2019 compared with the second half of 2018, while insurance cover sought for asset finance rose by 20 per cent, commercial mortgages by 41 per cent and invoice finance by 21 per cent.