Personal guarantees ‘overuse’ holding UK growth back 

The “overuse” of personal guarantees in borrowing arrangements is holding businesses back and stifling UK growth, innovators have warned, with only a small minority of companies claiming they would borrow from banks with their personal savings or assets on the line. 

A new survey of some 1,400 small business owners by the Federation of Small Businesses (FSB) has shown that just 13 per cent of businesses would take cash if a personal guarantee was required to secure a loan.

Entrepreneurs are now more worried that the requirement of personal guarantees has become normal practice among lenders as nearly four in five directors who have applied for finance said they were asked to take on liabilities. 

Around one in seven of the business owners who took up loans said they were taking a more cautious approach to expansion, with industry leaders claiming the UK economy would stand to suffer from low growth as a result. 

“Personal guarantees should never be the default setting,” said Tina McKenzie, policy chair of the FSB.  

“They must be a last resort, used with care and absolutely necessary. If we are serious about building a climate where small firms can thrive and new ideas can take root, we need to rein in their overuse.”

“Otherwise, the speed of small business growth will slow to a snail’s pace at a time we need it the most, and we risk turning away a wealth of entrepreneurial talent.”

The Financial Conduct Authority (FCA) responded to the FSB’s previous call by saying it would review policies and procedures for when personal guarantees may be required for loans under its watch. 

The government is ultimately for setting the remit of loans for small limited companies, which are largely not regulated by the FCA. 

FSB chiefs have called on the government to regulate loans as part of reforms made at public bodies. 

Growth hinges on financing rules

Small business minister Gareth Thomas and City minister Emma Reynolds collected the views of businesses on access to finance as recently as May. 

A government document stated that the Lending Standards Board (LSB), which is recognised by the FCA, had changed guidance to ensure businesses were warned about risks. 

But government officials called on businesses and lenders to provide data on how personal guarantees work in debt financing, with further reforms expected to be rolled out in the coming months as part of ambitions to drive growth through streamlining rules. 

The FCA said in December that, for the loans it does regulate, the number of personal guarantees in place was “low”, with “no material concerns” about compliance with rules being raised. 

Rachel Reeves is set to deliver her Mansion House speech next week, during which she will likely point to reforms to regulators made in the City. 

One of the expected reforms is curbing the powers of the Financial Ombudsman Service on making decisions regarding complaints.