Small business owners are expressing frustration over the restrictive practices of banks, which often require them to provide personal guarantees in order to secure loans for business growth.
The Federation of Small Businesses (FSB) has taken action on behalf of these entrepreneurs by filing a super-complaint with the Financial Conduct Authority (FCA) to draw attention to the demanding nature of banks when it comes to personal guarantees for business loans.
Personal guarantees can feel like a “straitjacket” on business expansion, as they force business owners to put their personal assets, such as their homes, at risk when seeking financial assistance.
In many cases, small business owners opt to take out insurance to protect themselves against the need to use a personal guarantee, which can add to the overall cost of the loan.
The burden of personal guarantees becomes even more apparent when they are attached to smaller loans, leading many business owners to either abandon their growth plans altogether or become overly cautious in their decision-making process. This cautious approach can hinder their ability to make bold choices and pursue new opportunities, according to the FSB.
A recent survey by Purbeck Personal Guarantee Insurance revealed that approximately 45% of business owners withdraw their applications for finance when faced with a personal guarantee requirement.
Unfortunately, the FCA is currently unable to intervene in these lending decisions, as they fall outside of its regulatory scope. The FSB is advocating for a change in this regard.
Although limited companies are designed to limit the liability of company directors, personal guarantees are often required for loans obtained by companies and guaranteed by their directors, undermining the concept of limited liability.
Martin McTague, national chairman of the FSB, emphasized the detrimental impact of personal guarantees on small business growth, stating that many entrepreneurs are opting to forgo external funding opportunities due to the risks associated with personal guarantees.
This trend not only harms individual businesses but also has broader economic implications, hindering overall economic growth and productivity.
For more information on personal guarantees and their impact on small businesses, stay tuned for our upcoming article on the topic.