Lenders are becoming increasingly risk averse and business owners who need funding to enact ambitious growth plans will need to consider their options for securing the necessary investment.
Where cash flow forecasts dictate that a loan is required, it is likely that the company director or directors will be required to sign a director’s guarantee to secure the loan. This legally obliges them to make the loan repayments from their personal resources, should the business prove unable to fulfil its financial commitment later on.
Deciding to act as a personal guarantor for a business loan comes with a unique set of risks which must be fully understood, accepted, and, where possible, mitigated prior to signature.
The risks
By signing a director guarantee, the company director accepts full personal liability for the financial stability of the business. By doing so, they put at risk their personal finances and any assets that they own, as should the business default on its loan, the lender is legally entitled to take possession of any of the director’s possessions or assets to the value of the outstanding debt.
Evidence shows that whilst it can take up to six months for a lender to repossess property or other assets from a business that has defaulted on a loan, it can take less than a month for them to bankrupt a company director who has signed a director’s guarantee.
Mitigating the risks
A responsible lender that requires a director’s guarantee to secure a business loan will advise and often require the company director or directors to seek independent legal advice prior to signing. The company director should choose a solicitors practice, such as Parachute Law, that is approved by their lender and ensure that they fully understand the risks and responsibilities under the agreement. The solicitor will ensure they are fully briefed.
Where a company has multiple directors, they should consider ways in which they can share the guarantee to prevent the exposure to defaulting being placed upon a single individual.
It may be possible to negotiate a time limit or cost cap with the lender to reduce the level of personal risk incurred. The lender is not required to accept negotiations and may elect not to lend any money should the directors fail to provide them with confidence that the loan can be repaid.
The company could offer assets as security against the loan, such as owned premises, machinery or vehicles, rather than the director acting as a personal guarantor.
Finally, should the lender mandate that only a director’s guarantee will be acceptable, it would be wise to take out personal guarantee insurance, which typically covers up to 80% of the value of the loan and can provide an essential safety net for the director. The insurance premiums are usually an acceptable business expense.
