A director guarantee can be a useful option if you want to offer confidence to creditors in order to secure funding for a business, but is it the right option for you and your business? These agreements are not something to be entered into without a lot of thought and planning, together with professional and independent legal advice. Read on to learn more.
What is a director’s guarantee?
A directors guarantee essentially means that the director makes a legal commitment to pay in the event that the company cannot. This can relate to a loan or a lease, or other contracts and financial arrangements.
The guarantee makes the company director personally liable, meaning that their personal assets will be at risk in the event of the business failing to meet its financial obligations. This can unlock vital funding for your business but can also have ruinous effects to individuals or partnerships if the debt is not repaid.
Why might you consider a guarantee?
There are times when a director guarantee can be helpful, such as:
– When the company is new with a limited trading history and added creditor confidence is required. This can help to unlock funds to pay for business growth, for example, some machinery that might otherwise be unattainable.
– If the business has no assets that lenders could claim against if they needed to.
– When the business does not pass initial credit checks but there is still a desire for a working relationship to be formed.
The major benefit of this is to the creditor but it can also open financial doors for a business which may remain closed otherwise.
The pitfalls of a director guarantee
The major downside of a director guarantee is that the director’s personal belongings are put at risk should the business fail to pay. Another issue is that these guarantees are hard to get to cover general trade debt.
Joint and several liability
It is possible for more than a single director to have liability. This means that, whilst each director will still be individually liable for company debts, they will also be jointly liable. In the event of a claim due to non-payment, a lender may choose to pursue one or both of the directors. Sometimes they will discover which director has the most personal assets and will simply pursue them for the total debt amount.
Get professional advice
There is no doubt that arranging a director guarantee for a loan is not a decision that should be taken lightly. If it involves property assets, it is important to get professional advice through specialists such as Sam Conveyancing.
Professional advice is also important if you find yourself with problem debt. A good first port of call in this instance is Citizens Advice.
Director guarantees can allow businesses to borrow larger sums or secure funding that might otherwise be unavailable. This could be a general loan or a mortgage to buy property.
These agreements are commonplace within the business and lending world, but due diligence is required, as is professional and independent legal advice. Personal assets will be put on the line with this sort of agreement and it is vital that everyone concerned fully understands and evaluates the risks involved.