Small Business Owners: Fighting Back Against Unfair Lending Practices
Small business owners are feeling constrained by banks that demand personal guarantees for business loans, hindering their ability to grow their ventures.
Representing these business owners, the Federation of Small Businesses (FSB) has filed a super-complaint with the Financial Conduct Authority (FCA) to call attention to the stringent lending practices of banks, which excessively require personal guarantees for business loans.
The FSB has argued that personal guarantees can significantly impede business growth, as entrepreneurs are forced to put their homes and other assets at risk when seeking finance.
Understanding Personal Guarantees
Many small business owners are puzzled by personal guarantees attached to business loans, as revealed by a recent study. It is important for entrepreneurs to understand what personal guarantees are and the potential impact they can have on their businesses.
Additionally, the cost of insurance against using personal guarantees can add an extra burden to the loan, ultimately affecting the financial health of the business.
When personal guarantees are applied to small loans, they can paralyze business owners and lead to caution in decision-making, hindering growth opportunities. According to the FSB, approximately 45% of business owners choose to forgo finance when faced with a personal guarantee.
This situation becomes even more concerning when considering the potential impact on the economy, as many promising ventures are unable to capitalize on new opportunities due to the limitations presented by personal guarantees.
Currently, the FCA does not have jurisdiction over these lending decisions, but the FSB is advocating for change in this area.
Personal guarantees are meant to limit the liability of company directors, but they often apply to loans taken out by companies and guaranteed by their directors, undermining the concept of limited liability.
Martin McTague, national chairman of the FSB, emphasized the challenges faced by entrepreneurs in securing small loans that require personal guarantees, ultimately stifling business growth.
Impact on Small Business Financing
It’s no wonder that many small business owners are opting to avoid external funding due to the potential risks associated with personal guarantees. This not only affects individual businesses, but also hinders overall economic growth and productivity.
The FSB’s initiative aims to shed light on the plight of small business owners impacted by personal guarantees, fostering dialogue and potential reform to support the growth of these ventures and the economy at large.
For more information and resources related to personal guarantees and their impact on small business financing, visit here.