Funding. The thorn in many an SME’s side. Accessing finance, whether it’s for tech investment, working capital or growth, has certainly become more challenging for SMEs over the past three years. Todd Davison, MD of Purbeck Personal Guarantee Insurance, outlines how SMEs can build financial resilience to ensure sustainable growth.
Small businesses that leverage technology effectively can outpace their competitors by automating processes, which enhances productivity. Yet, historically, the government has not supported small business tech adoption and innovation. A study by the Federation of Small Businesses in 2023, for example, found that 69% of small firms had introduced a new form of innovation in the last three years. This cost, on average, £27,000 for a small firm but increased revenue, on average, by 14.8%. But barriers, including time and affordability remain.
Accessing finance, whether it’s for tech investment, working capital or growth has certainly become more challenging for SMEs over the past three years. So, what can SMEs do? The answer lies in building financial resilience, whether that’s keeping close to the numbers, knowing what your loan options are or preparing to sign a personal guarantee, the cornerstone of sustainable growth is being in the know and if you don’t know – getting expert support.
The building blocks of financial resilience
There are plenty of distractions when running an SME, but establishing financial strength requires attention:
Actuals vs. budgets – Keep a check on financial performance to determine how it is tracking and trending. This will help forewarn of potential trading difficulties and allow time for mitigations.
Ask an expert – Outsourcing to a qualified CFO can help add credibility in supply chains, market reputation and future economic value (i.e., exit) with strong internal controls and accounting standards. They can also help provide a greater level of certainty of a business and provide data insights on non-performing products or services in a business.
Cash flow management – Creating a cash flow forecast is essential for anticipating cash needs, allowing businesses to take proactive measures to bridge potential gaps and maintain a healthy cash position.
Allocating budget – Keeping your eyes wide open when choosing where and when to spend can be helped by using technology, like cloud accounting software. This provides a critical real-time view of banking and financial data and can help to enhance operating margins and efficiencies.
Ways to qualify for a business loan
Numerous finance options exist for SMEs needing loans to get started or to grow. But what is needed to qualify for a business loan?
Building a business credit score – Lenders will check a business’s credit score to understand if they qualify for a small business loan. A company director’s personal credit score may be considered too.
The higher the credit score, the more choice of loans. Interest rates could be lower too.
It is important to research the options online or seek the help of a commercial finance broker to find one that suits.
Checking lenders’ criteria – Lenders will want to know all about the business, including but not limited to, capacity to make monthly repayments, the turnover and balance sheet, business assets, the accounts and financial statement and the personal financial details. Ideally, a business would want to build up a strong relationship with the lender in case they need to apply for further loans in years to come.
Getting paperwork together – Lenders may ask to see personal documents, including proof of identity and bank statements. They will want to view business supporting documents like bank statements, financial statements or audited accounts and business plans.
Writing a strong business plan – A business plan is crucial to the application. It should include an overview of the company, details about the products or services and a team structure. The operation plan, marketing plan and sales strategy will need to be explained and a SWOT analysis provided. Details of the current and projected finances are also essential to show that the loan repayments can be met.
Determining the commercial asset value – If lenders see a business as high risk, they will request security against the company director’s assets. These can include commercial premises, machinery and inventory.
The company director will need to provide a detailed estimate, and the lender will later arrange for a proper valuation.
Agreeing a personal guarantee – Finally, the personal assets of the company director can also be used as security for a business loan or financial agreement. This is useful if the business is getting established but is high risk. A personal guarantee entitles the lender to seize the personal assets of the guarantor, such as their home, if the business fails to make repayments. It is a pretty serious commitment, but not one to shy away from. They are a fact of life, and any business owner or director looking to invest will likely need to sign a personal guarantee at one point or another.
Mitigating the risks of a personal guarantee
Personal Guarantee Insurance (PGI) is certainly one way of mitigating the risks associated with personal guarantees. It ensures that if the business fails, 80% of the loan is covered by the insurance, protecting the business owner’s home, savings and other personal assets. Importantly, PGI offers mentoring and support at the point of debt settlement, alleviating significant stress for the business owner during challenging times.
Sharing the guarantee among a group of directors can be a sensible approach. It’s also worth negotiating with the lender for a time limit on the guarantee or a cap on the amount guaranteed. However, one downside to this strategy is that rising interest rates will increase the overall cost of the debt.
Another strategy is to request that the lender accept a guarantee for only part of the loan rather than the entire amount, with company assets, such as machinery or tools, used as collateral. If the lender agrees, the company’s assets would be used to settle the debt first, before the personal guarantee is enforced. Above all, seeking independent, expert advice from a solicitor or accountant when faced with a personal guarantee request is a must.
Is it worth taking out a personal guarantee?
The short answer is usually yes. It’s almost impossible to take out a loan, or source critical business funding, without a personal guarantee. The demands placed on company directors for personal guarantees look here to stay. Fundamentally personal guarantees are enablers, and when the risk is mitigated, personal guarantee backed loans can provide access to essential funding which SMEs may otherwise struggle to obtain.
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