The increasing challenge of securing business finance – and the potential Personal Guarantee risks of using Alternative Lenders
The ability for small businesses to secure finance has become significantly more challenging in recent years. According to a recent analysis by Funding Xchange, businesses seeking loans are now carrying more than double the debt-to-turnover ratio compared to pre-pandemic levels. This has made securing additional funding difficult, particularly for working capital needs, with rejection rates and Personal Guarantee risks increasing as lenders tighten their requirements.
Many businesses, faced with dwindling cash reserves and financial strain, are no longer borrowing for growth but for survival. Traditional bank lending to small and medium-sized enterprises (SMEs) has fallen dramatically – £90 billion below historic trends, according to Allica Bank. As UK businesses contend with higher base interest rates than their European counterparts, loan affordability is now more difficult than ever.
In this article, Elaine Wilkins, a director at our Bournemouth office, looks at the risks to struggling business owners of using an Alternative Lender, drawing on anecdotal experience, and suggests that a full business viability review is the first port of call if the mainstream banks have refused finance. This reduces the risk of a struggling business taking out a loan from an Alternative Lender that typically carries a very stringent Personal Guarantee (as the price for getting the loan) that gets called in when liquidation occurs, leading to significant personal finance issues for the director(s) involved, and even potentially bankruptcy.
As Elaine points out:
“I am regularly contacted by directors of SMEs who are struggling and need finance to improve their cash flow, pay down debts and continue in business. Often, they have been refused finance by mainstream banks and are considering approaching an Alternative Lender, because they have heard that the loan will be easier to get.
My advice to them is to think very carefully. There is normally a reason why a loan has been refused by a mainstream bank – because they think the risk is too great. The danger with Alternative Lenders is the stringent Personal Guarantees that the loan often comes with. If the business fails, because its underlying performance meant it could not be saved, the PG is called in and that can mean the director losing their house, or worse.
A particular problem is that the desire for a small business owner to save their business is strong, because it is their livelihood, and often has been a part of their lives for many years. They also feel strongly that they don’t want to let anyone down.
In one recent case that I came across, the father of a business owner pumped in £150,000 via an Alternative Lender loan to try and save his son’s business. Sadly, the business failed anyway and the PG that came with the loan has meant the father must now sell his house to repay the loan – and he has not found a way to tell his wife yet.
Although the temptation of an Alternative Lender can be difficult to resist, it is far better to get an accountant or an Insolvency Practitioner to do a detailed review of the viability of a business first before deciding on the best course of action.”
The temptation – and Personal Guarantee risks – of Alternative Lending
With mainstream banks rejecting more applications, directors often turn to Alternative Lenders, seeking quick solutions to cash flow issues. While these lenders may offer funding when traditional banks decline, they frequently require Personal Guarantees (PG’s) – a major risk that directors should consider carefully before signing.
A PG means that if the business cannot repay the loan, the director becomes personally liable for any shortfall. In an insolvency situation, this can lead to devastating financial consequences, including personal assets being seized. Alternative Lenders often have aggressive recovery processes, leaving directors personally exposed when their business struggles to stay afloat.
Why directors must think twice with Personal Guarantees
As Licensed Insolvency Practitioners, we regularly see directors who have signed Personal Guarantees without fully considering the risks, because the detail is buried in the small print, or they have signed it without reading the agreement at all. When insolvency occurs, they face pressure not only from creditors but also personal liabilities that extend beyond their business. It’s crucial for company directors to weigh their options carefully before taking on high-risk finance, particularly from lenders that demand stringent Personal Guarantees.
Instead of rushing into borrowing, directors should explore alternative strategies to navigate financial difficulty, such as restructuring liabilities, reviewing operational efficiencies, or seeking professional insolvency advice before making these decisions.
How can Insolvency Practitioners help?
If your business is struggling with debt, and you are considering additional borrowing, pause before committing to a loan that might create further complications. Antony Batty & Company specialises in guiding directors through financial distress, helping them assess all options, including sources of finance, before making decisions that could impact both their business and personal finances, and no, we do not always insist that liquidation is the only answer.
If all, or some of the company’s debts are secured by a Personal Guarantee, the director(s) are liable to repay the debt and it is likely that creditors will try and call on the guarantee. That’s where we come in – we will work towards a solution that all parties can accept.
Perhaps the most important thing Insolvency Practitioners can do is try and ensure that the guarantee is not called in and that means seeing if we can we find a way to save the business. Two options could be either a Company Voluntary Arrangement or a Company Administration.
If, however, the company is not viable and cannot be saved the only option may be to go into Liquidation. We can then help directors talk to the creditor who has insisted on calling in the guarantee and try and come to some sort of negotiated settlement.
Talk to us if facing insolvency and there are Personal Guarantee risks
If your company is struggling to pay its debts and is facing insolvency, the sooner you talk to us the better, especially if a Personal Guarantee is involved. If the Personal Guarantee has been properly legally drafted, then the only options are: to take action to put things right before the Guarantee is called in; come to an agreement to pay it over a period of time; or in the worst case go bankrupt. As always, the sooner action is taken the more options there are available.
Please contact us or call any of our offices, below, for a FREE initial discussion about Personal Guarantee Risks on the ‘phone or over a coffee.
Also, K&W Recovery, trading as Antony Batty and Company, Thames Valley:
