Businesses will sometimes ask their board of directors to sign a directors personal guarantee in order to secure finance. This may happen if the company is new and doesn’t yet have a solid credit history or is a start-up looking to expand quickly.
Although a directors personal guarantee is a commonly accepted means of providing security, it doesn’t mean that you should enter into one lightly. In fact, the best course of action when faced with a request for a directors personal guarantee is to seek legal advice from a solicitor such as https://www.parachutelaw.co.uk/director-guarantee.
It’s also important to consider these three things:
Your liability might not end when you leave the business
Many directors don’t realise that the directors personal guarantee they sign is still valid when they resign from a post. This means that they remain personally liable for the business debt, even once they have resigned. When this happens, it usually means that the director doesn’t resign as they no longer have access to financial information within the company or influence over how it is run.
Insolvency doesn’t change your status
Similarly, if the company goes bust, but the debt that you’ve secured with the directors personal guarantee isn’t fully repaid, the lender can then pursue you personally for the debt. This can mean that the assets you put up as security – such as your home, savings and so forth – are liable to be seized. Even if more than one director has signed a guarantee, the lender can go after the assets of any one of those directors.
You can cover up to 80% of your risk
There is actually insurance available. What many people don’t know about a directors personal guarantee is that up to 80% of it can be covered with a specialist insurance product. This isn’t always available in every instance, but it’s certainly worth investigating as an option if you are considering entering into this type of arrangement.
In short, although directors personal guarantee arrangements are common within business, they do come with significant risks and may not be suitable – or even wise – for everyone. Before considering signing this kind of guarantee, it is always wise to seek legal advice so that you are clear what you are signing up for, and what the risks are if the loan needs to be called in.
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