A guide to personal guarantees for business borrowing

It can be tough to find the right finance when you want to grow your business, take on staff, invest in marketing, reach new customers, or launch new products.

If what you need is debt finance – when a business borrows – you might already know that many banks can’t help everyone who applies and have to turn down applications which don’t meet their criteria.

In this article, the British Business Bank has collaborated with Responsible Finance, the national membership body for responsible finance providers, to explain how Community Development Finance Institutions (CDFIs) could provide the answer for businesses struggling to obtain finance, especially for businesses operating in deprived areas, are female-led, or minority-led.

Community Development Finance Institutions in the UK

Research shows many small businesses falling through finance gaps, with around 230,000 viable and well-established businesses unable to get the debt finance they need to grow every year because they don’t fit lenders’ risk profiles.

The stated figure likely underrepresents the actual scope of the issue, as numerous business owners hold off from applying for bank loans and other financial products, assuming their applications will be rejected.

Businesses from deprived areas, female-led and ethnic minority businesses can often face challenges in securing funding according to a report by the All-Party Parliamentary Group (APPG) on Fair Business Banking.

A lack of finance can often restrict business growth, but if your business is declined by a bank, it might not be the end of the road.

Some banks, when rejecting an application will highlight other types of lenders, particularly not-for-profit, “responsible” finance providers, as potential sources of funding to businesses they turn down.

These providers, often termed CDFIs, work in the more deprived areas of the UK with the majority of their lending made to businesses operating outside of London and the South East.

Their mission is to increase business activity and thus improve the wealth in these communities often locked out of finance, increase the job opportunities available, and enhance the social cohesion and community wellbeing.

In 2022 50% of the businesses CDFIs supported came from the UK’s 35% most disadvantaged areas.

As CDFI’s focus on getting to know the business behind the balance sheet they can also be a popular choice of lender for female-led and minority-led businesses, two groups that can find it harder to attract funding through traditional means.

In 2022 36% of all lending by CDFIs to small businesses was made to female-led businesses whilst minority-led businesses accounted for 15%.

Learn more about Community Development Finance Institutions.

How can a Community Development Finance Institution help minority-led or female-led businesses?

When an established bank rejects a request for a loan or other form of credit it can often be as a result of the following common issues:

• a weakened balance sheet with limited available cash.
• a low credit score, either for your business, or you and other directors.
• frequent use of an unarranged overdraft.
• insufficient assets to act as security or collateral.

Even if the business is otherwise viable, it is often the case that an application for finance will be rejected, often before a real person has looked at their application.

If a business is able to secure an offer of debt finance it may not meet its specific needs.

For example, the funding offered could be:

• a lower amount than the business applied for, which is inadequate to meet its ambitions.
• an overdraft instead of a loan, with the threat that this could be withdrawn at any time with little notice.
• an offer which places onerous security requirements on the business and its directors.

The good news is there may be another option for your business if you’re looking to borrow under £250,000.

CDFIs are finance providers which take a relationship-based approach to lending.

In practice this means they get to know you and your business.

They might visit your premises; they’ll certainly take a thorough look at your business plan, giving you as much support as they can based on their wide experience of nurturing businesses.

They’ll also seek to understand the market you are operating in.

This allows CDFIs to:

• look past a weakened balance sheet. A CDFI can make a realistic assessment of your chances of success.
• make their own decision on your credit history. CDFIs can look into any reasons you’ve not been able to keep up with credit commitments in the past. They will try to understand if you are on a stronger trajectory now than when things may have gone wrong previously.
• not rely on credit scores. Many mainstream lenders use score-based systems to assess business loan applications. These systems work well for many businesses but are not perfect. CDFIs do not take this approach and are more flexible in their analysis.
• understand a turbulent current account. Your business might be in a position where it has excesses over agreed credit facilities, or dishonoured payments. CDFIs can take time to understand the reasons behind the financial pressure you have been under. They can then make an informed decision based on the additional facts learned from talking to you.
• CDFIs will not place excessive security requirements on your business.

How do I apply for funding from a Community Development Finance Institution?

The first step towards applying for funding from a CDFI is to visit the Finding Finance website and search for your nearest CDFI.

In 2022, CDFIs lent around £248mn to businesses and social enterprises, and most of the businesses which borrowed from them last year had previously been turned down by mainstream lenders.

They lend where traditional and the new ‘challenger’ banks, and fintechs, cannot, and lend disproportionately more to under-served groups, such as businesses led by women, by black and ethnic minority entrepreneurs, and businesses based in areas of higher deprivation.

Despite having been declined by traditional lenders, 9 out of 10 customers of CDFIs successfully repay their loans – and many go on to become banks’ future customers as their businesses grow.

CDFIs’ business customers typically benefit from borrowing at lower interest rates than other sources of finance available to them.

In 2022 CDFIs lent £81mn to 3,230 start-ups and established small businesses, creating some 2570 new businesses.

They also lent over £117mn to 416 social enterprises which overall resulted in a 22% rise in the number of people and businesses turning to social purpose lenders.

Furthermore, in 2022 CDFIs provided 31,500 hours of pre-and post-investment support to start-ups, smaller businesses, and social enterprises.