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The Federation of Small Businesses (FSB) is advocating for a thorough investigation into the use of personal guarantees for small business loans, as the number of business owners stepping up as personal guarantors continues to climb.

Data from Purbeck Personal Guarantee Insurance, the UK’s exclusive provider of insurance protection for personal guarantees, reveals a 49% surge in small business owners seeking Personal Guarantee Insurance (PGI) for loans in Q1 2024, with many seeking funds to sustain their operations.

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Key Findings:

  • The average PGI commitment demanded by lenders from small business owners increased by 11% to £157,285 in Q1 2024, up from £141,264 in Q1 2023.
  • 37% of applications were for loans intended for working capital, marking the highest proportion on record.
  • Loans for growth initiatives experienced a slight decline, constituting 15% of applications in Q1 compared to 16% in Q4 2023 and 17% in Q3 2023.
  • 46% of PGI applications were for unsecured loans, the most prevalent type of loan requiring PGI, and the highest proportion to date.
  • Applications from businesses under 2 years old decreased by 29% in Q1 2024, with an average loan size of £118,000. Conversely, applications from established businesses trading for over two years rose by 21%.

March 2024 saw a peak in business owners seeking PGI, with construction firms facing particular pressure.

Construction sector

  • Construction firms accounted for the largest proportion (15.8%) of PGI applications.
  • Over half (54%) of construction firms sought PGI for working capital loans in Q1, up from 46% in Q1 2023.
  • 13% of applications were for loans ranging from £125,000 to £150,000, the highest proportion observed.
  • The average PGI commitment in construction increased to £162,076 from £131,944 in Q1 2023.

Todd Davison, Managing Director of Purbeck, said: “Our latest data should make interesting reading for the FSB and the Financial Conduct Authority (FCA) following the FSB’s Super Complaint regarding personal guarantee requirements for small business loans. 

“It is clear that personal guarantees have become part and parcel of small business lending and with the average personal guarantee at over £157k, (£162K in construction) based on our figures, the requirement for security from lenders is significant.

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“The key issue is whether a personal guarantee is appropriate and proportionate to the loan being offered. Additionally, business owners need to know what they are getting into so greater education on the risks and how to mitigate them is vital.  We look forward to seeing the outcome of the FCA’s investigations and what further actions are taken to help make personal guarantee requirements fair and legitimate.”

FSB launches super-complaint against excessive personal guarantees by banks

FCA to probe use of personal guarantees in SME loans