Is unsecured finance as unsecured as you think?

In this blog, Tom Whitlock discusses potential risks often overlooked when taking out a personal guaranteed loan.

As the alternative commercial finance market continues to grow, every week there seems to be a new lender willing to offer finance on an unsecured basis. To the business owner, this leaves business assets unencumbered for other borrowing, and leaves no charges on their family home. This can be very attractive to many business owners, who can’t wait to sign on the dotted line for unsecured facilities.

There is one consideration many overlook when signing the paperwork, and that is the personal guarantee form. According to research conducted by an insurer, 60% of all respondents didn’t realise the full implications of signing a personal guarantee at the time of signing the form.

With a personal guarantee now being more or less expected with unsecured lending, I often wonder whether personally guaranteed unsecured facilities are truly…unsecured?

It’s true, there’s no charge taken on property (domestic or commercial) or business assets to secure these facilities. What happens though if, let’s say, the worst-case scenario happens, and the company goes under with a significant unsecured loan owing.

For the purpose of this example, let’s imagine a business owner must cease trading with a £150,000 unsecured loan outstanding.

The business owner probably doesn’t have £150,000 at hand, potentially a lot less with the average UK saver having just over £4,000 in savings, and 1 in 4 adults have no savings at all. Should the lender enforce the personal guarantee, the asset most likely present to either sell or be used to secure more borrowing is going to be the family home. This also assumes that the lender is willing to give the borrower time to raise the funds before going through the courts.

When choosing to trade as a limited company, the reason many do so is to create a clearly defined line between the business and their personal life. In my view, this renders the limited liability status of companies more or less pointless if borrowing is simply going to be personally secured, circumventing the limited liability status of the company in a worst-case scenario.

One option available to those not wishing to sign personal guarantees is to turn to Pension-led funding for a solution, where we can raise finance for business owners without a personal guarantee at all. Not only that, but if the worst does happen and the business folds, the pension will be one of the first in line to recoup its funds from the business.

Assuming the worst doesn’t happen, the business owner sees the capital and interest accruing back in their own pension funds along the way. These funds can then be used for retirement, investment or further rounds of business funding should it be required.

An option not considered by many, could you or your client benefit from exploring this option?

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