If you are a director of a company, you may find that you are asked to provide a director guarantee by a lender. If the company needs a loan for investment or to settle a shortfall in cash flow, a lender may ask for further security since the company benefits from limited liability. Here we will look at how it works and what you need to consider before agreeing to sign one.
What is a director guarantee?
A director guarantee is an undertaking in which the director takes responsibility for the financial obligations which a loan involves. It is a form of security and means that the director’s personal assets can be used to settle the company debt should the latter default. Recently published data suggests that a personal director guarantee requirement has increased of late even when the loan is as low as £10,000
It may be the case that more than one director has agreed to provide a guarantee. This is known as a joint and several guarantee, and it is important to know the way that it works is that more than one director signs the guarantee, but if one reneges, the others remain liable.
What happens in the case of insolvency?
Personal guarantees can outlive the life of the company and are unbreakable. If you are unable to fulfil the obligations of your guarantee, you need to enter into negotiations with the lender and try to renegotiate the terms of the agreement. If this is not possible, insolvency will not negate the guarantee you have given. Loans you may have accepted could include bank overdrafts, a commercial rent agreement, invoice finance and business loans.
There are clearly serious consequences if a director personally guarantees a loan. Therefore, it is important that you take independent legal advice from specialist solicitors like Parachute Law before entering such a commitment.
When a director provides a guarantee, and if the loan is not repaid or the company becomes insolvent, personal assets such as savings, homes and cars can be used to repay the company debt.