Excessive personal guarantees are “shackling” ambition and risk stifling the growth the economy needs, the Federation of Small Businesses (FSB) has warned.
Research by the UK’s largest business group reveals that six in 10 (60%) limited company directors would borrow to grow their business if they did not have to put hard-earned assets like savings or their homes on the line. Only 13% would proceed if a personal guarantee was required.
The practice is now widespread, with 78% of directors who applied for finance being asked for a personal guarantee. Faced with this requirement, a quarter (24%) decided not to take up finance at all.
For those small business owners who were prepared to provide a personal guarantee, one in seven (14%) said it made them run their business more cautiously, limiting their appetite for risk until the loan was repaid.
The FCA’s initial response in March 2024 rejected urgent action, saying it would only review evidence for some smaller loans to sole traders and small partnerships, and would not act on personal guarantees attached to loans to directors of limited companies.
As personal guarantees become increasingly common, their overuse risks undermining small business growth.
FSB is now calling on the government to close the Financial Conduct Authority (FCA) loophole that leaves these loans unregulated and unsupervised by banks.
Tina McKenzie, policy chair of the Federation of Small Businesses, said: “Britain is brimming with ideas and so many entrepreneurs are hungry to both get started and grow their businesses. But right now, those seeking finance to make those dreams a reality are shackled by heavy-handed demands to put their own homes or savings on the line.”
“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.”
