A director guarantee means that you and any fellow directors are 100 per cent liable for an outstanding debt if the company can’t pay what is owed. This is typically a requirement when applying for a business loan and can be unsecured or secured. It is essential that directors offering guarantees on loans should carefully consider any possible consequences before agreeing to such an arrangement.
Why are directors content to give a guarantee?
A company director may have various reasons for being comfortable with giving a guarantee in support of a business loan. Usually, the person offering the guarantee will assume that the position is secure; however, this is not always the case. There have been many instances where a director guarantee has been put in place and the business went on to suffer financial pressure, with the directors having to shoulder the burden.
From a lender’s point of view, a directors guarantee ensures that a loan is more secure because the onus is not only on the borrowing company to pay it back but also if this position should shift, the individual director will be brought on board.
Guarantee serves as a way of providing reassurance to the lender
Lenders to small- and medium-sized businesses will want security in place if a company is not able to pay back the loan. The guarantee serves as a means of providing reassurance to the lender whilst giving companies the opportunity to access the cashflow they require to ensure smooth and profitable growth.
Security is paramount for the lender, but times have been tough for all businesses. According to Elite Business, small business owners fear that it may take more than a year to return to pre-Covid trading levels.
Personal guarantees can be advantageous and a win-win situation for all. One notable example is that they give startups or small companies that lack sufficient credit rating access to cash, enabling them to rent accommodation or office space or enter into a trade agreement that would otherwise not have been possible.
A guarantee is essential to get businesses into action; however, if debts become unmanageable, the consequences can be dire for the directors. The worst-case scenario is that they could lose their home or become bankrupt.
It is important to note that if a company has more than one director, it is normal practice for all directors to sign the guarantee. In this case, the liability lies with all directors and is referred to as joint and several liability. The liability will therefore stay in place until the debt has been paid in full, regardless of whether it is paid by one or more of the directors.