By - Todd Davison, Director of Purbeck Insurance Services

If you are one of the many small businesses that have turned to P2P lending to help fund your business, the news concerning the mixed fortunes of these platforms may be giving you pause for thought. P2P lending platforms have become a valuable route to cash for small businesses.  However, it appears that the well-publicised collapse of firms such as Lendy is making small businesses more focused on the risks, particularly where a Personal Guarantee has been signed to secure the funding.  

At Purbeck Insurance Services, we have seen the demand for Personal Guarantee Insurance from small business owners and directors who have secured finance from Peer to Peer lenders such as Funding Circle rise 40% in the first six months of 2019 compared to H2 2018.  This big jump certainly underlines the popularity of these platforms but also the fact that they are being used with caution.

As part of the agreement, businesses are usually required to pay the investor(s) their money back with interest - but, crucially, they don't have to sell any equity for debt focused Peer to Peer platforms. Depending on how much money is borrowed, they will typically be required to provide some security, in the form of business assets or a personal guarantee.  This is where Personal Guarantee insurance can work to moderate the risk to the business owner or director's assets if they have signed a Personal Guarantee.

Picking the right financing to start a small business depends on your circumstances, credit rating, business experience, and funding needs.  Borrowing money ‘close to home' from family and friends is common but has its pros and cons. Another popular initial way of financing to start a small business is via the Government-backed Start Up Loan scheme for loans of up to £25,000.   If you need more than £25,000, a small business loan from one of the high-street banks might be the best option.

It's no surprise that P2P lending platforms have proved popular for new businesses who have found it difficult to raise finance via their bank or other routes, but as with any finance deal, caution is advised.  Interest rates charged by some P2P lenders can soon rocket if a business defaults and we know some lenders are now tightening their lending criteria to small firms. 

If a business fails to repay a loan from a P2P lender then the lender has recourse to the Director personally under the terms of the Personal Guarantee and, if the Director does not have the means to repay the outstanding obligations, this can lead to bankruptcy.

It is some comfort to know that from April 2019, small businesses with fewer than 50 employees, and Personal Guarantors, can now complain to the Financial Ombudsman Service, if they feel they have been unfairly treated by their lender.  While this change along with new FCA rules for P2P lending platforms[i], should afford greater protection to small businesses, a belt and braces approach, using solutions such as Personal Guarantee Insurance, will help minimise the risks. 


[i] https://www.fca.org.uk/publications/policy-statements/ps19-14-loan-based-peer-to-peer-investment-based-crowdfunding-platforms-feedback-final-rules