Over half (54 per cent) of small- and medium-sized enterprises (SMEs) expect to use the recovery loan scheme (RLS) to boost their cashflow, new research has revealed.
Purbeck Personal Guarantee Insurance’s survey of 1,000 SME business owners has found 22 per cent plan to borrow over £250,000 through the scheme, becoming personal guarantors for the loan in the process.
The RLS provides government-backed loans of up to £10m to businesses during the pandemic.
Read more: Recovery loan scheme ‘off to a slow start’
The majority (54 per cent) of SME business owners believe that the RLS will be a key source of funding for SMEs in 2021, followed by a credit card facility (28 per cent) and overdraft (19 per cent).
This was followed by an alternative finance provider (15 per cent), asset finance (13 per cent) and friends and family (12 per cent).
The survey found that the bounce back loan scheme was the main source of funding in 2020, however 27 per cent used a credit card facility to keep business going while 30 per cent utilised an overdraft facility.
18 per cent of SMEs used asset finance and 15 per cent called on the support of friends and family.
Just over half of the SME owners and directors surveyed (53 per cent) feel the government has done enough to support small businesses, while 34 per cent disagreed with this view.
“Almost half of the businesses in need of cash are planning to apply for RLS but at this stage, the number of lenders is limited and we know the qualifying criteria is much tougher than the bounce back loan or coronavirus business interruption loan scheme so the success rate for applicants could be poor,” said Todd Davison, managing director of Purbeck Personal Guarantee Insurance.
“It also concerning that close to one in four business owners are planning to become personal guarantors under the RLS for loans over £250,000.
“While they won’t be liable for the whole amount and their private residence will be protected if their business fails, this is still a serious risk.
“Those firms unable to meet the criteria for RLS may also face the prospect of needing to sign a personal guarantee for a loan secured independently, putting their home and life savings on the line if the business fails.
“It is vital business owners prepare for this likelihood now, seek advice on how to cut that personal risk – whether that’s through sharing the guarantee with co-directors, agreeing terms for repayment of the loan or through personal guarantee insurance.
“This would settle up to 80 per cent of the loan, leaving a director’s personal assets protected should the business fail.”