Exclusive interview with Purbeck’s Todd Davison on reducing risk
Todd Davison, managing director of Purbeck Insurance, talks to Marc Shoffman about the benefits of personal guarantee insurance for peer-to-peer lenders and businesses…
Rising rates and stretched affordability can make it harder for borrowers to access finance.
Many lenders, including some peer-to-peer lending platforms, may ask for personal guarantees from directors to reduce the risk of business loans.
This passes some of the risk to the business director though and is an area Purbeck Insurance is trying to address with personal guarantee cover.
Todd Davison, managing director of Purbeck, explains how the brand’s unique personal guarantee product aims to give lenders reassurance when providing funds, and also helps directors access much-needed finance.
Marc Shoffman (MS): What does Purbeck Insurance do?
Todd Davison (TD): We help UK small- and medium-sized enterprises (SMEs) focus on unique niche risks and develop risk management solutions for them. The product is a critical tool.
When a small business is going to raise finance, such as through P2P lenders, the director is often asked to sign a personal guarantee. This gives the lender recourse if the loan isn’t repaid as they can go after the director.
Read more: Start-up founders increasingly asked to sign PG for business loan
That creates a risk for SMEs though so we wanted to develop a product that gives them the chance to talk about business finance, grow the top line and provide a safety net for the director providing the guarantee.
We are trying to position ourselves to champion UK SMEs while growing their business. It can help where lenders are reticent to provide finance.
MS: How do you work with P2P lenders?
TD: We have worked with a number of P2P lenders where a personal guarantee is required, they will introduce the client for us to consider. Since we launched back in June 2017, we have supported 2,000 SMEs and provided £250m of personal guarantees. Of that, £95m is in respect of P2P lenders.
A lot of the time these loans are completely unsecured so a lender is taking the personal guarantee as security, which provides risk for directors.
Read more: Acquisition top cause of business insolvency, Purbeck finds
Our aim is to have a proactive contract. It isn’t just an indemnity we are providing. The service also helps a business manage risks. We ask directors to give us a call if they are facing issues with cashflow, that is the first step in a claim.
MS: How easy is it to sell the benefits of your product?
TD: Our conversion rate is 80 per cent, that tells me the product is priced quite well on an affordability basis particularly when you look at the cost of business loans. It is not just a commodity driven product because of the services we have built in beyond the indemnity.
We have finessed our sales messages around the benefits. It is about a director understanding the risk of signing that personal guarantee and protecting themselves. We feel we have proved the risk to make sure it isn’t a friction point.
Our research shows around 29 per cent of SMEs didn’t take out business finance because of the risk of signing a personal guarantee, but 74 per cent said they would if they could insure against it. It comes hand in hand with wanting to access finance and having a safety net if things go wrong.
MS: How do you price the indemnity?
TD: We look at the premium in the same way lenders will assess the loan. It is about considering the financial strength of the business, the sector, their balance sheet compositions and the director’s track record. The premiums are predominantly driven by the financials and creditworthiness of the business that is then applied to the personal guarantee.
MS: How much demand is there for this indemnity?
TD: There is no other facility like this in the UK. We had our first quarterly fall in demand during the second quarter of this year but I think some of that is to do with the macroeconomic headwinds and interest rates rising.
Demand was still up annually though. We are seeing more and more enquiries coming through. This product can protect businesses when times are tough.
MS: Who are your typical customers?
TD: If you look at a cross section of our book, it is very representative of the SME market. It includes sectors such as construction and manufacturing, where we have the largest concentration, but there is also demand from hospitality and retail where we have seen more claims activity.
We are also getting a number of enquiries where there has been a business acquisition. There have been a number of instances where the deal hasn’t gone to plan. For example, the acquiror would find the business has debts to pay off previous shareholders.
MS: How will you develop your offering?
TD: One of our big ambitions is to develop these unique guarantees. We are working on a new landlord-focused product to protect those with buy-to-let portfolios in a limited company.
There are lots of legislative and regulatory changes for landlords to cope with and lots are putting their portfolios in limited companies.
Read more: SMEs urged to take out PG insurance amid rising insolvencies
We have had a number of enquiries about guarantees and have been working with insurers, so we are looking to launch a spin-off.
MS: Do you expect to see more claims on the indemnities due to the economic climate?
TD: Insolvencies are rising, so it is possible that there will be more claims on the guarantees.
Businesses are dealing with the economic environment and late payments. Many firms got government support during the pandemic such as coronavirus business interruption loans or used deferral schemes. This gave them a lifeline and delayed a lot of insolvencies, but more may be happening now.
We are certainly seeing an increase in terms of claims but also our book is bigger now so we have more clients.
MS: How can P2P lenders work better with you?
TD: The main challenges we have as a business is the market awareness of what we are doing. We would be keen to work with more lenders to support them and their clients.
We are typically working with smaller P2P lenders, where it has worked it has been successful in terms of referrals.
It takes time to develop relationships and work out a lender’s risk assessment. The onus is on us to continue to raise awareness and profile and in time we will continue to evolve our relationships. Our objective is to make this solution more prominent in the commercial finance space to directors and lenders.
