UK firms run for cover as business confidence slumps

Small businesses owners have driven a leap in demand for protection over the inability to repay businesses loans as confidence in the future collapses.

The number of small business owners who took insurance to guard against failure in last years reached a record with applications for personal guarantee insurance up 106% in quarter four of last year 2022 and 145% for 2022 compared to the previous 12 months.

It came as the Federation of Small Businesses (FSB) revealed SME’s confidence in the final quarter of 2022 plunged to a depth almost on a par with that measured during the second Covid lockdown two years previously, new research from FSB has found.

The Small Business Index (SBI)’s headline confidence figure in Q4 2022 fell to -46 points, down from -36 points in Q3 2022, and the lowest level since Q4 2020, when it was -49 points.

Personal guarantee insurance (PGI), a product used by small business owners to protect against the risk of a personal guarantee being called in for a business loan, saw a steep rise in popularity in 2022 as the owners and directors of some of the UK’s smaller, limited businesses, took on new finance that put their personal assets at risk.

Lenders will often ask for a personal guarantee when there are not enough assets in the business to repay the loan if the business fails. Specialist Purbeck Personal Guarantee Insurance said it has seen applications for protection more than double, rising by 106% in Q4 2022 vs Q4 2021. Across the whole of 2022, applications for personal guarantee insurance rose 145% on 2021 underlining the personal risks many small business owners have accepted in the past year to keep their businesses from insolvency.

Personal guarantee insurance has proved to be particularly popular amongst the owners and directors of smaller manufacturing businesses where there has been a 285% increase in applications for PGI in Q4 2022, compared to the same period in 2021.

The company said the biggest reason for personal guarantee backed finance is ‘working capital’ with 35% of insurance applications for this reason. Year on year, the volume of personal guarantee backed finance for working capital grew 144% on 2021. In addition, asset purchase, typically for new equipment or machinery doubled in volume year on year.

Todd Davison, MD of Purbeck Personal Guarantee Insurance said: “We know small businesses are facing huge cost challenges as they try to recover from the pandemic and problems with access to the finance they need to continue operating. Our latest PGI monitor shows that where loans are being made available, the owner is needing to take on a big chunk of risk themselves and a rapidly growing number are therefore taking steps to protect their personal assets should their business fail. We must not forget, business owners are not only facing increasing costs at work, they are keeping the wolf from the door at home too, it therefore makes perfect sense that they are doing what they can to bring some certainty in very uncertain times.”

The separate FSB’s survey found more small firms reported a drop in revenues over the previous three months (43%) than reported a rise (33%), and their outlook for the next three months reflected this as well, with 44% expecting to see a fall in revenues against three in ten anticipating a rise (29%).

Inflation continued to take a toll on small businesses, with nearly two in five saying costs were significantly higher (38%) than in the same period a year prior. Utility bills, including energy, were cited by over three in five small firms as a driver of their change in costs (61%).

Late payments are still holding back a significant number of small firms, with three in ten small businesses (30%) saying their payment situation had worsened over the previous three months.

FSB National chair, Martin McTague, explained: “There’s no way to sugar-coat these figures – small businesses’ confidence is at its third-lowest level since we started tracking it nearly a decade ago. But business owners are resilient and where there is a will, we will find a way through.

“Clearly, falling consumer spending, inflation, and high energy bills are all taking a toll, and poor results after the golden quarter are particularly disappointing – but this should also be a time to grasp the nettle and be decisive in finding more ways for the economy to grow, which is why we have drawn up a plan of action for the Government to implement.”

“Small firms are a fantastic national resource of innovation and creativity – especially if given the right conditions to flourish,” he added. “These results are incredibly worrying, yes, but they are not the final word.”

Personal guarantee insurance (PGI), a product used by small business owners to protect against the risk of a personal guarantee being called in for a business loan, saw a steep rise in popularity in 2022 as the owners and directors of some of the UK’s smaller, limited businesses, took on new finance that put their personal assets at risk.

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