Entrepreneurs have been urged to consider personal guarantee-backed business loans, rather than relying on credit cards and overdrafts.
Purbeck Personal Guarantee Insurance, which launched a broker portal earlier this week, said it is vital that people understand their options before taking out a personal guarantee.
“Entrepreneurs now more than ever will face the difficult decision of whether to sign a personal guarantee as security to the lender for a business loan or to source funding from their own back pockets using credit cards and overdrafts, or from friends, family and investors,” said Todd Davison, managing director of Purbeck Personal Guarantee Insurance.
“Indeed, we found that aside from the government loan support schemes, credit cards and overdrafts have been the most common sources of funding for small businesses over the last two years.”
The personal guarantee insurance provider recently found that nearly half (45 per cent) of small- and medium-sized enterprise business owners said they had decided against taking out a business loan because it included a personal guarantee.
But almost two-thirds (64 per cent) said they’d be more likely to sign a personal guarantee if there was insurance in place to protect against the risk of providing it.
“Our survey suggests many business owners/directors walk away from a loan agreement backed by a personal guarantee without knowing how to mitigate the risks,” Davison said.
“There will be others who sign on the dotted line not understanding they could lose their home, car and other personal assets if the business fails.
“It is vital entrepreneurs fully understand their options. Speaking to an accountant, financial adviser, commercial finance broker or their bank is a good first step.
“Aside from personal guarantee insurance which will cover up to 80 per cent of the guarantee, there are other ways entrepreneurs can mitigate their personal risk such as sharing the guarantee with other directors.
“Starting up a business can be both fraught and exciting. By sorting out the finances first giving due consideration to all the options available, entrepreneurs can focus on making their pandemic inspired idea a success.”