If you are a director on a business board, you might be asked to sign a director guarantee, especially in an SME or start-up business. But what is this exactly and how does it differ from a personal guarantee?
Understanding the role of a director guarantee
A guarantee is basically a promise that you will take responsibility for the business’s debt if it can’t meet loan repayments. You’re effectively a loan co-signer. Lenders generally require security when they offer business loans, so a director guarantee means that you, personally, undertake the loan.
If your business can’t meet its loan obligations, the lender will come after your personal security. This could be your savings, your house or your car. Directors’ guarantees are generally only requested of business directors. A solicitor such as Parachute Law can provide more information about this.
What a personal guarantee covers
A personal guarantee provides that same liability, but it can be taken out by anyone, not necessarily a director. In this way, it has a broader reach than the director guarantee and it can be taken on by shareholders or even third parties who aren’t connected to the company’s management. Again though, the individual is liable for the debt
Should you take on a guarantee?
This question is very personal to your circumstances and role within the business. It’s best to take legal advice, remembering that if the loan is defaulted against, you will be personally liable for the debt the minute you sign that dotted line! This can be a significant risk to any individual, even if they are confident in the firm’s performance.
For many SMEs, these kinds of guarantees are the only way to get funding from lenders who need to see a form of security. But they certainly do represent a risk to the individual who signs the guarantee, and the guarantee doesn’t expire if that director leaves the company.
Always get qualified advice before you sign, remembering that a lender can – and will – go after your personal assets if they need to.
