The Federation of Small Businesses (FSB) has urged the UK government to provide small business owners with protection against personal guarantees (PGs) to encourage investment and growth. The call follows the Financial Conduct Authority’s (FCA) announcement of an investigation into the use of PGs in lending.
Martin McTague, National Chair of the FSB, criticised the scope of the FCA’s inquiry, stating it was “severely undermined” by its decision not to examine loans made to directors of limited companies.
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“Lenders are most likely to ask for a personal guarantee when lending to a limited company, and some do so as a blanket and disproportionate policy,” McTague said. “The FCA has not looked at this segment of the lending market at all.”
PGs, which often require company directors to put personal assets such as their homes on the line to secure loans, have a significant deterrent effect on business growth, according to McTague. He described the practice as undermining entrepreneurial risk-taking and leading many businesses to avoid borrowing entirely.
Citing Bank of England research, McTague noted that 70% of businesses prefer to grow slowly rather than take on debt, with concerns over PGs being a major factor.
“The chilling effect of being asked to risk your family home undermines risk-taking and investment by company directors, while the consequences for a director’s personal finances, if a personal guarantee is called upon, can be devastating,” he added.
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By GlobalDataThe FSB is calling for the government to legislate to bring PGs under the FCA’s Consumer Duty framework, ensuring better protection for small business owners. McTague suggested such a move could be announced in the forthcoming Small Business Command Paper, enabling entrepreneurs to invest and expand without fear of undue personal financial risk.
The FCA has not yet responded to the FSB’s criticisms of its investigation’s limited scope.
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