Small businesses are increasingly turning to personal guarantee-backed loans for working capital, as rising costs erode their cash reserves.
Applications for personal guarantee insurance to support business funding more than doubled year-on-year in March, according to Purbeck Personal Guarantee Insurance. The number of applications in the first quarter of the year were 50.5 per cent higher than at the same time in 2021.
The main reason for funding were for working capital, making up 35 per cent of applications. This was followed by development capital and investment in growth initiatives.
Over the last 12 months, applications for personal guarantee insurance to support funding for working capital were up 88 per cent as businesses scrambled to cope with Brexit, skills shortages, rising material and fuel costs.
Purbeck also found that small businesses are borrowing more than before, with a 22 per cent rise in the average loan amount to £174,104. One in five loan applications were for loans of £375,000-£400,000 – an increase of 160 per cent compared with the first three months of 2021.
“While there is obviously a concern that small businesses are becoming more indebted, the fact that applications for personal guarantee insurance to support this finance have risen so substantially year on year must be seen as a positive,” said Todd Davison, managing director of Purbeck Person Guarantee Insurance.
He said that most of the owners are leading businesses that have been in operation for 14 years on average and have around 28 people working for them.
“Access to finance is increasingly reliant on the business owner signing a personal guarantee so it is vital small business leaders understand how they can mitigate the risks to give them the confidence to secure the new finance they need – whether that’s to sustain the business through this challenging economic period, or to grow,” he added.
Meanwhile, unsecured loans have also risen in popularity, Purbeck found, accounting for 39 per cent of all personal guarantee insurance backed loans in the first quarter of 2022 compared with 28 per cent in the first quarter of 2021.