How small businesses can strengthen their financial footing in 2025

Todd Davison, MD of Purbeck Personal Guarantee Insurance:

Managing the finances has become a formidable task for many small businesses so here are my key tips. These involve staying on top of cashflow, understanding your loan options, and being ready to sign a personal guarantee if necessary. The foundation of sustainable growth is knowledge.

Building financial resilience

Actuals vs Budgets – Keep check on financial performance to determine how it is tracking and trending. This will help forewarn of potential trading difficulties and allow time for mitigations.

Cash flow management – Creating a cash flow forecast is essential for anticipating cash needs, allowing businesses to take proactive measures to bridge potential gaps and maintain a healthy cash position.

Allocating Budget – Consider using technology, like cloud accounting software.  This provides a critical real-time view of banking and financial data and can help to enhance operating margins and efficiencies.

Ways to Qualify for a Business Loan

Numerous loan options exist but what is needed to qualify for a business loan?

Building a business credit score – Lenders will check a business’s credit score to understand if they qualify for a small business loan. A company director’s personal credit score may be considered too. The higher the credit score, the more choice of loans. Interest rates could be lower too.

Research the options online or seek the help of a commercial finance broker to find one that suits.

Checking lenders’ criteria – Lenders will want to know all about the business, including the capacity to make monthly repayments; the turnover and balance sheet; business assets; the accounts and financial statement; and the personal financial details.

Getting paperwork together – Lenders may ask to see proof of identity, and bank statements. They may also want to view financial statements or audited accounts, and business plans.

Writing a strong business plan – A business plan is crucial to the application. It should include an overview of the company, details about the products or services, and a team structure. The operation plan, marketing plan, and sales strategy will need to be explained and a SWOT analysis provided.

Details of the current and projected finances are also essential, to show that the loan repayments can be met.

Determining the commercial asset value – If lenders see a business as high risk, they will request security against the company director’s assets. These can include commercial premises, machinery and inventory.

The company director will need to provide a detailed estimate, and the lender will later arrange for a proper valuation.

Agreeing a Personal Guarantee – Finally, the personal assets of the company director can also be used as security for a business loan or financial agreement. This is useful if the business is getting established, but is high risk.

A Personal Guarantee entitles the lender to seize the personal assets of the guarantor such as their home, if the business fails to make repayments. It is a serious commitment but not one to shy away from. Any business owner or director looking to invest will likely need to sign a personal guarantee at one point or another.

Mitigating the risks of a personal guarantee

Personal Guarantee Insurance (PGI)  – This is certainly one way of mitigating the risks associated with personal guarantees. It ensures that if the business fails, 80% of the loan is covered by the insurance, protecting the business owner’s home, savings, and other personal assets. Importantly, PGI offers mentoring and support at the point of debt settlement, alleviating significant stress for the business owner during challenging times.

Sharing the guarantee among a group of directors – This can be a sensible approach. It’s also worth negotiating with the lender for a time limit on the guarantee or a cap on the amount guaranteed. However, one downside to this strategy is that rising interest rates will increase the overall cost of the debt.

Request that the lender accept a guarantee for only part of the loan rather than the entire amount – In this scenario company assets, such as machinery or tools could be used as collateral. If the lender agrees, the company’s assets would be used to settle the debt first, before the personal guarantee is enforced.

Seek independent, expert advice – talk to a solicitor or accountant when faced with a personal guarantee request.

Is it worth taking out a personal guarantee?

It’s almost impossible to take out a loan, or source critical business funding, without a personal guarantee.

When the risk is mitigated, personal guarantee backed loans can provide access to essential funding, your business may otherwise struggle to obtain.