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Shoring up defences

Building greater financial resilience

Todd Davison Managing Director Purbeck Insurance Services

As a business solely focussed on helping small business owners mitigate their financial risks through Personal Guarantee Insurance, Purbeck has been on the front line of the fall-out from COVID-19. The value of Personal Guarantee Insurance has really come to the fore in the last few months and this will remain the case as lockdown eases and the recovery process begins.

Part and parcel of cover is mentoring and support services to firms in financial distress. It is as much in our interests to help businesses survive this crisis and indeed future challenges, as it is our clients.

Doubling of PGI enquiries

In January, February and March, as the UK watched what was happening in China, Italy and other parts of the world, through the lens of the media and listened to stark warnings from our government, we saw applications for Personal Guarantee Insurance (PGI) double year-on-year. Small businesses were shoring up their defences and this strategy will have to continue as part of the recovery process.

At this stage, a number of our customers have seen their business affected adversely although most of these businesses are mitigating these issues by proactive intervention (e.g. utilising the Job Retention Scheme, VAT deferral and payment holidays) to alleviate short-term trading concerns. While our insurance cover is available to businesses at any stage in their growth, our customers are generally running well-established businesses with ten or more years of trading under their belts.

The launch of the Trade Credit Insurance guarantee should also mean small businesses (particularly those in the construction and manufacturing sectors) can continue to access affordable insurance to support trading with other businesses and provide confidence within the supply chain. It will be critical for policymakers to work closely with insurers, funders, and businesses for the scheme to work effectively and to promote liquidity within these markets. “

From 1 st December this year, HMRC will become a preferred creditor in a business insolvency for certain HMRC debts, moving from sixth position to third in the list of creditors to be paid following a business collapse

“In short, it looks set to become harder, costlier and riskier for small business owners seeking new finance for growth

There is little doubt that the government’s support measures have been vital, but they not only have a shelf life, they may impact a small business’s future ability to borrow. It is therefore important that we start to look forward to how businesses can begin to recover and rebuild. It is also worth remembering, not all businesses have been severely affected, in fact some that have pivoted fast have found new trading opportunities.

Demand for personal guarantees to grow

Many businesses will want to invest in marketing, technology, machinery – it may be slow but there will be a demand for finance to support this recovery and growth. However, all the signs suggest that access to finance will not be easy. The demand for personal guarantees by lenders was already on the up based on a survey we conducted last year amongst commercial brokers – 47% of brokers said they had seen a rise in demand for personal guarantees as part of a new business finance package. That demand is only going to grow as lenders become more risk averse.

The impact of CBILS and BBLS

If businesses have already secured loans via CBILS or BBLS, when they start looking for additional finance, they will have to prepare loan interest/repayment serviceability to demonstrate they are able to repay their obligations with these loans in place.

The additional factor to consider is the change in insolvency rules. From 1 st December this year, HMRC will become a preferred creditor in a business insolvency for certain HMRC debts, moving from sixth position to third in the list of creditors to be paid following a business collapse. Fixed charge creditors are first on the list, insolvency practitioners’ fees and expenses are second.

This leaves less funds in the pot to settle any outstanding business loans and offset the personal guarantee following business failure and again could force lenders to get tighter on requiring personal guarantees. This applies to where Personal Guarantees are attached to business finance facilities with floating charges and where personal guarantees are attached to unsecured business finance facilities.

Restricted credit appetite

It is also likely that there may be a good number of lenders who will, for some time, operate on a restricted credit risk appetite and focus on existing clients and forbearance measures. Furthermore, many non-bank lenders who are institutionally or wholesale funded may also be resistant to allow funds to be advanced to small businesses particularly if the lender has a credit impaired loan book.

On balance, therefore, there is a possibility of a lack of available credit in some areas and this may also increase the cost of borrowing for businesses as well as increase the demands for security.

In short, it looks set to become harder, costlier and riskier for small business owners seeking new finance for growth. Where finance is offered on the condition of a personal guarantee, Personal Guarantee Insurance should therefore be considered. It can be a key tool in helping businesses build their confidence and financial resilience as part of the recovery process.