As a director of a limited company, you are considered to be a separate legal entity to your business. You are therefore not responsible for its debts; however, signing a director guarantee waives this protection and means that in the event of business insolvency, creditors can chase you for repayment.
Why would someone sign a director guarantee?
A director guarantee is often required by lenders to secure a business loan, as it reduces their risk and can make lending large sums of money more palatable. A director may feel that agreeing to sign a director guarantee demonstrates their faith in their business.
What are the benefits of a director guarantee?
A director guarantee can enable directors to access greater sums of money than would otherwise be possible. This can improve cash flow, enabling them to pursue business growth opportunities or secure premises that would otherwise be unattainable.
What are the risks of a director guarantee?
If your business becomes unable to repay its debts, lenders may seek compensation from your personal funds. This could, in the worst-case scenario, lead to bankruptcy and the repossession of your family home.
Can you secure the money you need and minimise your risk exposure?
You will need to perform a thorough assessment of your business’s historical financial performance and future forecast to assure yourself that your plans are affordable. Not only will this bolster lender confidence but also it could eradicate the need for a director guarantee.
If you are unable to dissuade a lender from requiring a director guarantee, you may still be able to push for a limited guarantee that minimises your personal risk exposure. This is more likely to be accepted if the risk is shared among multiple directors.
You could also consider taking out director guarantee insurance to protect against future insolvency
Should you sign a director guarantee?
You should only sign a director guarantee if you have taken all reasonable measures to assure yourself of your ability to repay and put in place safeguards to protect yourself in the event of future unforeseen circumstances.
