SME loans: have you placed yourself at personal risk?

Back during the COVID-19 era, large numbers of SMEs faced a huge challenge to stay afloat. Closed shops and offices, lower customer spend, increased Health & Safety costs – for many, income dropped while expenditure soared. Little wonder, then, that many firms have turned to SME loans for a lifeline.

Many business owners take out loans because they believe limited company status prevents them from being personally liable for repayments. Unfortunately, this is not always the case – many loans require a personal guarantee.

What does a personal guarantee mean?

According to research by Reparo Finance, there’s a lot of confusion among business owners about what a personal guarantee means when they take out SME loans. Some key findings include:

• 12% believed a personal guarantee simply meant certifying they had provided accurate information in a loan application
• 14% thought it meant they understood a loan’s terms and conditions
• 18% believed a personal guarantee is a promise the business can meet repayments
• 3% were unsure what a personal guarantee was.

Different SME loans have different conditions. However, if you give a personal guarantee for a business loan, it means that you can become personally liable for repayments if your company cannot meet them. Depending on the type of personal guarantee you have given, you could be faced with repaying some or all of the bill if things go wrong. Worryingly, it appears as though some business owners are unaware that they’ve put their own assets at risk.

Are personal guarantees enforced for SME loans?

The simple answer is ‘yes’. If you have given a personal guarantee, a lender will enforce it if your business can no longer repay your loan. This conflicts with the belief of 11% of business owners polled in the same research who thought a personal guarantee wouldn’t be enforced if their business went bust.

How can I limit personal risk?

21% of businesses owners incorrectly assume limited company status protects them from personal liability for borrowings. This is not the case if you have given a personal guarantee. Before you sign any loan agreement, be sure to get independent legal advice on its terms and conditions. A quarter of businesses fail to do this, potentially storing up problems for the future.

How common are personal guarantees for SME loans?

Personal guarantees are very common. One recent study has found that a third of SME owners became a personal guarantor for a business loan back in the COVID era of 2020. Some of these personal guarantees were given for government-backed loans, such as CBILS. Businesses borrowing more than £250,000 under that scheme could be asked for a personal guarantee (albeit one that was capped).

I need an SME loan. What do I do next?

Before you take out any loan, your first step should be to talk to your accountant. At THP, we can help clients work out whether loans are affordable, or whether different financial strategies are more suitable for their needs. However, if you do decide to take out an SME loan, ask a legal professional to check out the small print. Only ever take on personal risk that you are comfortable with. We all want to do the best for our businesses, but sometimes things go wrong – and that’s not worth risking your home and your savings for.