Harsh Personal Guarantees Will Chill Growth Ambitions, Say Small Businesses

Heavy-handed personal guarantees are “shackling” ambition and risk holding back the growth the economy needs, the Federation of Small Businesses (FSB) has warned.

Research by the UK’s largest business group shows 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 houses on the line.

Only 13 per cent would go ahead if a personal guarantee was required.

The practice is now widespread, with 78 per cent of directors who applied for finance being asked for a personal guarantee. Faced with this, a quarter (24%) decided not to take up finance at all.

For those small business owners who were prepared to undertake a personal guarantee, one in seven (14%) said it made them run their business more cautiously, curbing their appetite for risk until the loan was paid off.

For the first time in its history, in December 2023, FSB used its historic super-complainant status on behalf of UK small business customers to call for action on personal guarantees.

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 excessive use 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.

Without action, would-be entrepreneurs could be deterred from starting up, with personal risk outweighing ambition and ideas left unrealised.

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.”

“With confidence among small businesses already at a low ebb, it’s never been more important to remove the barriers holding them back and put real, sustained growth at the top of the agenda.”

“Personal guarantees should never be the default setting – 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.”