If you are searching for funding for your business, then you may be considering signing a directors guarantee as a way to reassure potential creditors that their money will be repaid. This may make it easier to secure an initial loan, but it could also leave you liable for future debts if the agreement is not drawn up carefully. You must consider all the factors.
What is a directors guarantee?
A directors guarantee is a form of extra security for any money a business may owe. If the company is unable to meet its repayment obligations, the director will be personally liable for the debt. They will have to use their own funds to ensure that creditors are satisfied. One situation where you may find a directors guarantee is when the business is purchasing property and needs to take out a mortgage.
What types of directors guarantee are available?
Not all directors guarantees are the same. Some are limited, meaning the director is only liable for a certain percentage of money owed, but others are unlimited. In these cases, the director could be personally liable for all losses experienced by the business, even those that have nothing to do with the original debt, and in which they may not have been personally involved.
The circumstances when you may be called on to repay the debt may also vary. Sometimes, you will immediately become liable if only one payment is missed. In others, there may be more of a grace period.
How do you take out a directors guarantee?
As a directors guarantee is a legally binding document that could lead to you losing money or property, it is generally advisable to have it drawn up by a solicitor, such as those at https://www.samconveyancing.co.uk/news/conveyancing/directors-guarantee-the-risks-of-personal-guarantees-by-directors-9999. They will be able to explain the nuances.
Without legal advice, you risk making yourself liable for a larger portion of the company debt than you intended. You need to be clear whether you are taking on just the original debt, the original debt plus costs, the original debt, costs and any future borrowing, or even all future losses.
You also need to know exactly what circumstances will trigger the repayment requirement. When a director fails to meet their obligations under the guarantee, they risk creating additional financial hardship not just for the company, but also for themselves.
Directors guarantees can be a valuable way to secure funding or mortgages that would otherwise be unavailable. Some lenders will not provide the money without such a guarantee. Nevertheless, you need to be very clear about your degree of liability, the circumstances when you may become responsible for repayments, and any potential additional costs.
