A director guarantee can allow you to borrow money for your business but comes with some very serious risks should the company become insolvent. Let’s take a look at these legal agreements and the pros and cons.

What is a director guarantee?

A director guarantee is a legal contract between a director and a lender. It offers security for the lender that the money will be repaid, even if there are not enough funds in the company.

Positives of a Director Guarantee

A director guarantee can give you access to loans that might otherwise be refused. A lender may agree to a loan that may otherwise be rejected as your business assets might not cover the amount of the loan. Personal guarantees can be tailor-made to determine how much liability you face, based on discussions between both parties and legal advice from solicitors such as https://www.parachutelaw.co.uk/director-guarantee.

Loan money secured with the help of a director guarantee can release vital working capital for a business, funding everything from day-to-day operational activities and business continuation to company growth.

The Downside of a Director Guarantee

If you have signed a director guarantee and the loan is defaulted upon, you will be responsible for paying back the money. The guarantee removes the protection of limited liability, where a business is considered a separate legal entity, and replaces it with personal liability.

This could leave you facing loan repayments at a time when your business is already in financial difficulty (and insolvency). For many directors, this is the worst time to face further personal outgoings. Help and advice on business debts can be found on the Business Debtline website

In some instances, a personal guarantee can include a charge on personal assets, insisted upon by the lender. This could lead to the loss of your home and other assets if the company loan is defaulted upon and you, as director, cannot meet repayment liabilities. This is why appropriate legal advice is always essential if you are considering a personal director guarantee.