A director guarantee is a legally binding agreement that makes a company’s director personally liable for the business’ debt repayments. This is a risky strategy that some directors employ to demonstrate their confidence in the viability of their business or when other funding strategies have been exhausted.
Before signing a director guarantee, there are 3 things that you must consider:
1. Being personally liable is an enormous responsibility.
Should the business fail to make its repayments or be declared insolvent, the director will be required to repay the debt from their personal funds, potentially selling personal assets such as their home, to make the necessary repayments.
This can affect their credit score, push them into bankruptcy and put them at risk of CCJs, making it harder to secure any form of loan or finance agreement in the future and jeopardising their personal and professional lives.
2. Your family could be impacted.
Though your spouse may be entirely unconnected to your business, if you co-own property with them, they will also be required to sign the director guarantee. This is necessary to demonstrate that they understand that their home is at risk should the business default on its repayments and make them jointly liable for repaying the loan.
Ultimately, if your business fails, your whole family could end up in dire financial straits and potentially homeless.
3. Director guarantees do not expire with resignation or retirement.
Leaving the business does not absolve you of your responsibilities. In fact, it is a risky strategy as it eliminates your influence over how the company is run while still maintaining personal responsibility for financial decisions made in your absence.
To resign or retire before the loan is repaid would require you to maintain personal responsibility or transfer that responsibility to a replacement guarantor which some lenders may be unwilling to do.
Advice is crucial
You should always seek independent legal advice from a qualified solicitor such as https://www.parachutelaw.co.uk/director-guarantee prior to signing a director guarantee. They will ensure that you understand the responsibility that you would assume upon signing and help you to consider alternative courses of action.
Should you decide to proceed, they may recommend taking out an indemnity policy to protect you. Known as Personal Guarantee Insurance, this policy would cover up to 80% of your risk and though expensive, the peace of mind gained is invaluable.