Growing Together: Reframing Personal Guarantees

Personal Guarantees (PGs) are under the microscope. Both the super-complaint from the Federation of Small Businesses last December and the recent report from the House of Commons Treasury select committee suggested the use of personal guarantees in business loan applications could be ‘disproportionate’ and ‘disincentivise[s] risk taking’.

Here is our take on how the industry got to where it is with its use of PGs and their role moving forward.

Define ‘disproportionate’

PGs are being portrayed as a finance hurdle being forced upon small businesses by lenders.

For us as a lender, PGs are of course a useful tool to manage and communicate risk. It’s a way for us share the risk with the borrowing business and ensure that we’re it in together.

What’s proportionate here surely is a matter for the lender, who is taking a risk with their money, and the borrower, who is asking for that money for their business. After all, it’s the lender’s, our, area of expertise. But lenders must also listen to SME owners’ concerns and work collaboratively with them.

Chicken & egg

A common response from business owners to the request for a PG is that if their business is performing well, why do we as a lender need a PG?

Well, if a business is performing exactly as the owner or broker claims, then a PG shouldn’t be disproportionate or place undue burden on the SME: it simply backs up what’s been promised.

Where there’s resistance to a PG, it often means the financial state of the business is less than ideal. In this case, it’s more than fair for a lender to ask for the extra protection of a PG. It should also be the trigger point for a ‘cards on the table’ conversation between business, broker and lender.

It’s a careful balancing act to keep all parties happy. There is a very real concern that if greater regulations on commercial lending were rolled out – lenders would simply leave the market. Reparo exists to support SME growth, but if lenders don’t act with care and protect themselves – we won’t be around to help anybody!

A little history lesson

There’s also the possibility that the use of PGs today is criticised more exactly because lenders are going to greater length to explain their significance.  To put it into the wider context, let’s look back at recent history.

Before the 2008 financial crash, if an SME needed money, the first port of call was a bank for a personal loan or overdraft. PGs were commonly in use then, but it was just part of the paperwork, and not questioned as much. Perhaps because people didn’t understand what they were signing.

In fact, research conducted by Reparo found that even in 2021, 47% of SME owners and shareholders that had recently borrowed money for their business did not understand what PGs were.

In the post-recession market, banks stepped away. Commercial lenders stepped in, and the likes of assets finance and invoice finance emerged.

Fast forward a few years, COVID hit and with it the Bounce Back Loan Scheme was born. It took around 10 minutes to apply for the loan. Fast access to quick cash became the ‘new normal’ for a few years.

In 2024, we’re back to business as usual. Today, SMEs struggle to get loans from banks. Lenders like Reparo are the go-to for smaller businesses. Perhaps the “easy money” of the COVID period skewed expectations. The level of information that lenders ask for isn’t new. It just got easier for a short period – and for exceptional reasons.

As turning to Reparo and our peers is one of the funding few options for SMEs today, it’s likely that the scrutiny PGs are currently under is in part due to an increased understanding of what PGs actually are. And we think that’s a good thing!

Education is the name of the game

We agree with NACFB Managing Director Norman Chambers’ comment in the latest issue of the Commercial Broker magazine. He said: “Whilst PGs serve as a critical tool for risk management, enabling lenders to extend credit under more favourable conditions, there is a clear and pressing need to ensure that these guarantees do not become prohibitive to growth.”

For us here at Reparo, education is the solution. Lenders like us must do more to educate brokers and business owners about the role of PGs and the purpose of the information requested.

Yes, PGs can be scary. They aren’t something to be taken lightly. And that’s partially the point. We want to encourage business owners to protect the asset(s) that are part of the PG. But more than that, we want them to stop and think seriously about what they’re signing.

We feel that any responsible lender should suggest businesses take independent legal advice (ILA). It’s our recommend in every deal we fund.

Yes, the deal might take a little longer to fund, but it’s worth it. When business owners have time to digest what they’re getting into, seek ILA, and ask questions – of us, their broker and solicitor – then we’re truly in it together.

Find out how we’re supporting SMEs here: reparofinance.co.uk/reparo-structured/