Director guarantees, or personal guarantees, can be a good way for a business to open up access to financing that they otherwise would not be able to get. A personal guarantee is more attractive for lenders who are considering lending to businesses where there is a higher risk they may default.
However, taking on a personal guarantee comes with risks for directors. Here are some of the main ones:
You risk your personal property
In these difficult economic times, company insolvencies are going up. A company insolvency will immediately trigger a director guarantee. Even if a firm is not insolvent, but is defaulting on its payments, then the personal director guarantee will be triggered.
As a director has put up their own assets as a guarantee, if they cannot pay back the loan, then the lender may go to court to secure a judgement for an Order Charging Land against the director’s personal property. They can also take steps to force the bankruptcy of the director.
You might still be liable after you leave
When resigning from a company, a director is not necessarily free of any personal guarantees that they have made against company debts. Departing directors can ask to be released from the director guarantee, but this is down to the lender, who is likely to ask for another guarantor.
For this reason, directors should think carefully about giving up their position if they are responsible for debts as they may still be held liable, with no control over how the company is run. It is advisable to seek legal advice from experts such as https://www.parachutelaw.co.uk/director-guarantee who can advise on options.
For the reasons above, you should always seek legal advice before entering into a personal director guarantee.