Managing Your Cash Flow

SMEs wanting to ride the Brexit storm must shape up their finances

7 min read

15 March 2019

Brexit is causing a lot of concern for many people, SMEs included. The best thing businesses can do amongst all the uncertainty is to get their finances ship-shape, here's how to do it including the safest ways to borrow money to fund the business through the rough seas.

SMEs endeavouring to plan for Brexit will be looking carefully at cash-flow to gauge how much pressure they can take without additional borrowing. The main concern is that day to day running costs will rise – this might be due to material costs going up, wage bills increasing as the migrant workforce reduces and higher warehousing costs for stockpiled goods.

All these factors impact the basic day to day expense involved in keeping a business afloat. As a consequence, some predictions have already emerged of an upsurge in borrowing demand from SMEs if a ‘no deal’ Brexit occurs.

Borrowing money for the business needs careful thought

Protecting your business: How much money are you willing to give?

This is particularly important where Personal Guarantees are required.  Are you ready to put your home and savings on the line for your business?

A recent report by the British Business Bank suggests half of small business owners have taken this significant step to help them secure a loan for their business.

They found that as many as 62% of SMEs sought external funding in the past 3 years and 73% of these finance agreements required some kind of security – with a Director backed Personal Guarantee the most common requirement.

Business owners, how much are you willing to risk?

Without access to finance, businesses struggle to get off the ground and grow but putting your home and/or lifetime savings up as a guarantee for a loan is a big ask for business owners, particularly in the midst of such economic uncertainty.

It’s therefore vital that the directors and owners of SMEs fully acquaint themselves with the terms of a Personal Guarantee backed loan, before signing on the dotted line.

What happens when things go wrong?

If things go wrong and a claim is made under the guarantee, the guarantors will be liable to pay the company’s debt and their personal assets will make up any shortfall.

When a guarantee can’t be settled, the risk is bankruptcy. This has long term consequences – it will stop the guarantor being able to act as a company director in the future without court permission and will negatively impact their credit rating.

A minority stakeholding won’t necessarily offer protection either as a lender will pursue whoever they believe is most likely to settle the debt.

Think about Personal Guarantees carefully

So when considering a Personal Guarantee backed loan, go into discussions armed with all the facts and potential risks. Be as genuinely objective about the financial prospects of the business and its commercial value too. Seek absolute clarity on the terms of the guarantee and on all eventualities.

Despite how optimistic you are about the future prospects for your business when you sign a Personal Guarantee, a whole host of external factors over which you have no control, can conspire against you – from the economy and late payment to Brexit. Even the weather can have a significant impact on the success or failure of a business.

How can you mitigate the risk?

It’s essential to ask your broker, solicitor or lender what you can do to help mitigate the risk. For example, do ask whether it’s possible to negotiate the percentage of the loan you should guarantee. Not all lenders require a guarantee for the sum total of the loan.

Also enquire about insurance to protect yourself against the risk of the Personal Guarantee being called upon to settle the loan, keeping your personal assets safe in the future.

Personal Guarantee insurance 101

This is a relatively new type of insurance protection. It is available to those who already have a Personal Guarantee backed loan or are considering an application for a new finance arrangement with the premium treated as part of the finance deal and therefore paid for by the business. The insurance mitigates against potential financial loss for up to 80% of the value of the Personal Guarantee.

It can cover one or several guarantors for a business loan, helping to establish a more even balance of liabilities among directors.

Up until recently, there was very little protection for business owners and directors if a Personal Guarantee backed loan was called in. Considering company insolvencies in 2018 were the highest since 2014, the loss of savings and personal assets would have been the grim reality for many business owners in the past year.

Taking out insurance can work for SME owners

The good news is that some finance brokers are now insisting small business owners should consider taking out insurance as a condition of negotiating funding. This allows the directors and owners of SMEs to focus on the day job, not worry about the personal risks they are taking to keep their business on track.

7 facts to check before signing a Personal Guarantee for a business loan:

Bridging loans can help secure finance when time is short

Personal Guarantees: Are you clued up about what they entail?

1.  How will the lender enforce the guarantee?

2. Can the lender serve notice or seek payment on demand?

3. What exactly constitutes a default?

4. Do the terms allow for any remedy period upon default?

5. How will your net personal assets be assessed prior to the giving of the guarantee, and is this is likely to change?

6. Does the contract state that the lender must exhaust every other avenue before making demands on you?

7.  Have you considered the cost of obtaining Personal Guarantee insurance?