What you need to know about director’s guarantees

When a small business or company needs a loan, they are often asked for a director’s guarantee. This is where, in order to access finance, the director or directors of the company promise to repay any debt owed if the company fails.

Why are they needed?

A bank or building society is likely to ask for a personal director guarantee on a loan application, as it wants to be assured that it can recoup the money if the business goes bankrupt. The lender needs a way to mitigate the risk of non-repayment when lending to a small start-up with no revenue, customers or credit history.

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They may also be required by a commercial landlord for a property lease for the same reason. As business loans are often the only way of getting a business off the ground, many owners have to agree to a director guarantee.

According to The Times, the Federation of Small Businesses has asked for the Financial Conduct Authority to look into the way banks are excessively demanding personal director guarantees for business loans.

What do they mean?

A director guarantee is a legally binding contract, which means that if you as the signatory fail to meet the obligations of that contract, you will be liable to pay funds back to the creditor. If you’ve signed a director guarantee, you will be liable for any debts owed by the company, meaning that you could lose your own home and all your assets if the business cannot pay them back.

Therefore, before signing a director guarantee, it’s important to get legal advice from an experienced firm such as https://www.parachutelaw.co.uk/director-guarantee who can check all the terms and conditions first. These should stipulate how long the guarantee will last, as once your business is a success and generating lots of revenue, you could renegotiate or even apply for new credit without taking out another personal guarantee.

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Even if you leave the company, it doesn’t mean that you are released from your obligations on the guarantee, unless this is stipulated in the contract. Most guarantees say that a guarantor can only be released by the creditor and in writing, so you may find yourself in the position of having resigned and having no decision-making powers, but still being liable for any company obligations. If there is more than one guarantor, you will be jointly liable.