For small businesses, obtaining the funding needed to get the business up and running can be tricky. From the lender’s point of view, new businesses are a risk: without years of accounts, they are cautious as to whether the money can be repaid in a timely manner. For this reason, lenders will sometimes ask for a directors’ guarantee. This type of guarantee is signed by one or more of the business’s directors and assures their personal liability for the repayment of any debts should the business be unable to repay them itself.
What are the benefits of this?
Signing a director’s guarantee means that the business is far more likely to be accepted for a business loan. With this financing, the business can buy products, fund a website, employ staff, present at trade fairs, or whatever it needs in terms of startup.
For businesses that are further along in their trading journey, a director’s guarantee can enable them to obtain a loan to push the business to the next step; for example, it could fund further staff, a second office, or even a company vehicle. Even for businesses that are doing well, funding is often crucial to advance the business onto the next rung of the ladder.
Are there any risks?
In short, yes – signing a director’s guarantee can be something of a risk. Should the business be unable to repay its debts, the legal liability is on the director as the guarantor, even if this means their personal assets or estate are at risk. The government website has more information on the role of a company director.
Obtaining expert advice before entering into any sort of director guarantee is always a good idea. Specialists such as Parachute Law can provide tailored advice to protect the director and minimise the personal risk.
It is possible to acquire insurance to mitigate this risk, which is known as personal guarantee insurance. Again, seeking specialist legal advice can keep you informed and protected before committing.
