Almost half (47 per cent) of small- and medium-sized enterprise (SME) owners do not properly understand that they are placing themselves at personal risk by using personal guarantees when taking out loans.
According to new research from business lender Reparo Finance, a fifth (21 per cent) of SMEs wrongly assumed that limited company status would protect them personally from their company’s borrowings, while 11 per cent believed that a personal guarantee wouldn’t be enforced during company insolvency.
18 per cent of SME owners said that a personal guarantee represents a promise that their business can honour repayments, whilst 14 per cent described it as a guarantee that they personally understand the terms and conditions of a loan.
A further 12 per cent of SMEs told Reparo Finance that they believe a personal guarantee is their guarantee that they’ve provided accurate and true information during the loan application.
Three per cent of those surveyed were unsure what a personal guarantee was and what it involves.
“The response to the pandemic and business survival has prioritised quick, available access to borrowing,” said Steve Richardson, a director at Reparo Finance.
“This may well be detracting from companies paying proper attention to loan terms and conditions, which risks SME owners and shareholders personally taking on financial liabilities they don’t understand.
“Credit terms will not always be limited to the solvency of a company and repayments will still have to be honoured in the eventuality of the company experiencing difficulties. Of course, there are terms to any loan – that’s prudent for all, but it’s really important that SMEs fully understand their exact obligations when agreeing to credit.”
Reparo Finance has estimated that 64 per cent of small and medium sized companies are likely to borrow money in the next three years because of the pandemic, making it all the most important for business owners to understand the risk that they are taking on.
Richardson added that a quarter of SME borrowers didn’t take any independent legal advice to check the terms and conditions while taking out a loan.
“This figure is way too high,” he said. “Borrowers should always draw on legal expertise to check they are comfortable with the financial agreements they are making, and lenders should encourage this – it’s about taking a responsible and sustainable approach to business lending.”