In UK, SME Owners Can Lose The Store … And Everything Else

The old saying goes that you should never apply for a loan when you need it. But the fact remains that lending is the lifeblood — and, at times, a lifesaver — for small and mid-sized businesses.

But in the U.K., many business owners are not as aware as they should be when it comes to signing on for a loan — at least in terms of what’s at stake. A recent study by U.K.-based SME lender Wirefund found that, across a survey of 510 business owners spanning several verticals, 55 percent of respondents said they were not sure just what a “personal loan guarantee” entailed. And 21 percent said that they believed the loans mandated that they pay “to the best of their ability.”

Simply put, that guarantee means that a business owner, should he or she default on a loan, could be at risk for losing all sorts of personal assets to satisfy the lender, including a house or a car.

In an interview with PYMNTS, Wirefund CEO and Founder Amit Sankey said that the study’s findings illustrate a real need for “education for people to know just what they are getting into” when it comes to taking on debt. He noted that businesses have been on the upswing since the dark days of the financial crisis. But should a cash crunch occur, then that is when trouble can begin in earnest.

The personal loan guarantee is a staple among the High Street banks of the U.K., said Sankey, and in interactions between banks, brokers and would-be borrowers, the details of the personal guarantees are often “glossed over” during the application process. The fact remains, said the executive, that borrowers may feel a sense of urgency during the loan process — if business is going well, then they want the money in hand to help fund growth opportunities in the here and now.

Should there be a cash flow problem underway, then the urgency is to get the money to help shepherd the business through rough times. In either case, the fine print and the fine details within the fine print may be put to the side. “They are usually passionate about something, and they are excited” to get their business up and running, or expanding, said Sankey, or “they are in a difficult situation.” And truly going through the fine print may fall by the wayside (and, notably, the banks and brokers may not be the ones walking them through it line by line).

Beyond education about the potential pitfalls of a personal guarantee, Sankey noted that one solution can be, and should be, alternatives to the standard personal guarantee, such as offering loans without that mandate, likely with slightly higher rates.