Signing a director guarantee is a big financial undertaking. It means that you are financially responsible for the debts of the company and that the lender in question can pursue you personally for your assets if the company defaults on its finance arrangement.
However, despite the risks, many directors sign a director guarantee because it is the only way to secure business finance for a start-up or SME that doesn’t yet have a solid credit rating or trading history.
Are you confident?
If the director is confident that the business can perform and meet its loan obligations, he or she may be willing to personally underwrite that loan with their own assets. However, the director guarantee represents a significant risk because lenders can – and do – come after individuals if loan repayments are not met.
This means that your home, savings, car and other assets can be seized by the lender and sold to raise the necessary funds. These funds will also include various administrative charges.
Why you must seek advice
Because a director guarantee is a legal document and such a significant undertaking, it is best to seek expert legal advice from a solicitor such as Parachute Law before you agree to one. Remember, the minute you sign on the dotted line, you are liable. You cannot change your mind later.
What many directors don’t realise either, is that they do not exit their liabilities if they leave that business. The relationship with the business is not relevant to the guarantee, which will remain in place until the business has fully repaid its financial obligation to the lender in question
If you sign a director guarantee, your savings, investments, property and assets are on the line until that business loan is repaid in full. Your credit rating is also at risk, as a defaulting business loan will personally affect your credit rating. Of course, sometimes these guarantees are necessary to take a business forward, but it’s always vital to seek the right advice before you sign.