By Todd Davison, MD, Purbeck Insurance Services

It is probably fair to say there aren’t too many insurance products that support the policyholder to help prevent a claim from occurring.  But then Personal Guarantee Insurance is not like most other types of insurance.  Personal Guarantee Insurance is a niche and relatively new type of insurance for the owners and directors of small businesses across the UK who have taken the serious step of putting their personal assets such as their home and life savings on the line to secure a business loan.

Personal Guarantee Dilemma

We estimate over 420,000 small business owners in the UK are acting as personal guarantors for business loans. By providing a personal guarantee in support of a business loan, the director is providing the lender with recourse to his/her personal estate which, in effect, lifts the veil of incorporation afforded through a Limited Company or Limited Liability Partnership. It’s a common and also an increasing business dilemma.

Personal Guarantee Insurance mitigates that risk, providing peace of mind that if the loan is called in, up to 80% will be settled by the cover.  Fundamentally this type of protection gives the directors and owners of small businesses (personal guarantors) the confidence to take out business finance to start up or pursue their growth objectives.

Personal Guarantee Insurance Applications Double

Applications for Personal Guarantee Insurance doubled in February and March ahead of lockdown and Purbeck has supported a series of applications for Personal Guarantee Insurance for CBILS loans.  For example, an IT company applied for a £3,000,000 Coronavirus Business Interruption Loan to assist cash flow. The directors were, however, put off taking out the CBILS loan due to a £300k joint and several Personal Guarantees required to support the facility. The Directors opted to utilise Personal Guarantee Insurance to mitigate the potential risk to their personal estates.

Part and parcel of cover is the provision of mentoring and support to businesses who do get into financial difficulty.  These services have and will continue to prove invaluable to customers affected by the COVID-19 pandemic.

When the Going Gets Tough

While Personal Guarantee Insurance is priced competitively, the peace of mind offered in respect of the policyholder’s personal estate and the support desk provided by Purbeck if a business is facing early signs of financial distress has proved to be a primary motivation for purchasing cover.

Knowing that as a business you won’t get left high and dry when things start getting tough is really valued by our policyholders and of course we have a vested interesting in ensuring the success of our clients’ business.

As the first line of defence to try to avoid the failure of the business, the support desk provides unlimited mentoring, business advice and support. Not surprisingly it’s been pretty busy over the last few months though our client base has shown immense resilience to date.

If our support and advice does not assist the business, the policy will then step in to provide agreed levels of indemnity to protect the directors’ personal assets/estate.

Demand Mitigation Response Service

As part of the cover we also provide a demand mitigation response service through our partnership with AFT Assist, up to the value of £10,000 within our policy cover.  This has been a key draw for policy holders – it’s not just about covering the risk of a Personal Guarantee, we are helping small business owners through a pretty turbulent and stressful times in their lives.  AFT Assist offers expert support and advice at the point the debt needs to be settled, acting as a point of liaison for the lender.  This takes a huge burden off the shoulders of the client.

As a concept, Personal Guarantee protection had been dappled with by the insurance market but never really taken off until three years ago when the directors of Purbeck who have expertise in commercial finance and insolvency as well as experience working with SMEs, could see how Personal Guarantee Insurance could be made into a compelling and unique product that offers real value to policyholders.

Increasing demand for Personal Guarantees

Personal guarantees became more commonplace following the Financial Crisis of 2008-2009.  However, with an assumed tightening of credit and security requirements as an outcome of the pandemic, we expect lenders will increasingly demand personal guarantees as they look to protect their positions.

Lenders will also be conscious of the fact that HMRC will move up the list of creditors in an insolvency, from 1st December this year.  This may make them even more cautious about lending to small businesses and therefore more likely to want a personal guarantee as security.

With the Government support schemes starting to ease off, and access to finance increasingly likely to depend on signing a Personal Guarantee, Personal Guarantee Insurance will step in to help protect the UK’s SME owners and directors – in more ways than might be expected from an insurance product.