In this blog, we’re going to look at what a director’s personal guarantee is, when it’s used and whether it can be risky for the individual who is considering taking on such a liability.
What is a director guarantee?
When a business needs to borrow to start up, grow or pivot, it needs to access finance. For new businesses, there is unlikely to be a ready pot of cash reserves or access to other reliable and established sources of unsecured finance.
This means that the business will need to take on secured finance which is guaranteed by personal security. This is the director guarantee. An individual director, or directors, will sign a personal guarantee that means that they are personally liable for the loan. Find out more here: https://www.parachutelaw.co.uk/director-guarantee.
What are the implications of the director guarantee?
If the business defaults on the loan repayments, in order to recover the outstanding sum, the lender can legally pursue the directors who secured the guarantee against their own assets. This means that directors can find that their personal assets, including their house, can be forfeited and sold to release funds to the lender. Directors can, and do, become bankrupt by these arrangements, which can be risky.
Should a director take out a personal guarantee?
Often, the directors of a new business will take out a director guarantee to ensure the growth of a business they believe in. But there are significant risks attached to such a move, which means that legal advice should always be taken first. The director who takes on this guarantee can ultimately forfeit his or her own personal assets in order to protect the company. Such a move must always be very carefully considered beforehand to avoid the individual experiencing significant losses if the finance agreement fails.