When looking for finance for your business, you may notice that many lenders ask for personal guarantees before they'll part with any money.
If you need extra funding for growth, new equipment or hardware, providing a director's guarantee helps to reassure lenders that they will definitely get their money back should your company be unable to repay the loan.
What are personal guarantees?
Limited companies are completely separate entities to their owners. That means, should the firm be unable to repay its loans, it would not fall on you or any other employees to settle up. In a worst-case scenario, you may be forced to liquidate the company to cover any outstanding debts.
Personal guarantees, on the other hand, make you and your fellow company directors and shareholders personally liable for these repayments if your business be unable to cover them.
Director's guarantees are commonly asked for in situations where a company is particularly small or has very few assets.
Much like with personal loans, directors' guarantees can be either secured or unsecured. If a loan is secured then you need to put up assets as collateral in order to be approved for the finance. If a lender asks for a secured personal guarantee and your company fails, they could potentially seize your home in order to recover the debt.
This is, of course, a worst-case scenario, but it is still important to consider when giving your personal guarantee.
Do I need to give a director's guarantee?
Whilst many banks, finance companies, trade suppliers and asset leasing firms may prefer personal guarantees before lending to you, no one is going to force you to sign it. If you are not comfortable with the idea of being personally liable for your company's debts, it may be worth seeking other providers for your funding.
If it is an invoice factorer requiring a director's guarantee, you may be able to find a similar suitable provider who does not require it. Don’t take the first offer – shop around.
You may also need to give a personal guarantee along with other shareholders. If directors' guarantees are required, all directors in the company will need to agree to a level of liability that is proportionate to their shareholding.
That said, in most cases, these personal guarantees are jointly and severally liable. Say you have three company directors in your company. Should one disappear, the remaining two of you would need to split the loan repayment 50/50.
When might my personal guarantee be called in?
It is most likely that directors' guarantees will be called in shortly before your business becomes insolvent if it appears the company is going that way.
Lenders and landlords will try to make their claim as early as possible if your limited company appears to be struggling with debts to ensure an easier recovery of their money. But, as mentioned, these guarantees can still be called in after the company has run out of money; coming from the company directors’ pockets instead.
These lenders can choose to call in your personal guarantee at any time, so occurrences like not following the terms and conditions of your contract or receiving a county court judgement could spur lenders to demand their money back.
What happens if my director's guarantee is called in?
Should a lender not receive payment on the withstanding amount or payment of arrears after multiple reminders, they can issue a Statutory Demand against you.
Then, you will have just 21 days to pay your creditor back, or they have the right to:
- Apply for a county court or high court judgement, or
- Start bankruptcy proceedings
If they decide to go ahead with a high court or county court judgement, it is possible that lenders could have bailiffs in or apply for a charging order to secure the debt against your property. This essentially means the court could legally force you to sell your home in order to pay off the outstanding debts.
What should I do if I am asked to give a director's guarantee?
Whether or not you choose to give your personal guarantee is entirely your choice, so make sure you don't feel pressure into it either way.
If your other shareholders are waiting for you to agree, or a particular lender is adamant they need a personal guarantee to grant your funding, consider trying to negotiate a better deal beforehand.
You could attempt to agree on a specific sum that you will cover with your director's guarantee rather than being held personally liable to cover the entire outstanding balance should other directors not pay.
You may also be able to have the lender agree to liquidate your business assets to recover money should you default on a payment before coming after you for the money.
Seek professional advice
If you have been asked to give a director's guarantee and would like to know more about how it may impact on you and your finances, speak to The Financial Management Centre today. Please call us on 0800 470 4820 or email firstname.lastname@example.org.