A director guarantee, sometimes called a personal guarantee, is a legally binding document used in business agreements. In short, it means the director makes a personal guarantee that they will cover certain costs if the business becomes unable to do so. It only applies to the financial obligations set out in the director guarantee. The idea of a directors guarantee is that it provides security to lenders, suppliers, and landlords.
Who needs a directors guarantee
Director guarantees are generally only used by limited companies. More often than not, this sort of guarantee is used to provide assurance to a creditor, such as a loan company or mortgage lender, and is helpful for new businesses that haven’t had a chance to build up a good credit rating. The guarantee is often a requirement of the creditor, who will only enter a financial agreement with this in place.
What you need to know
Although a director guarantee can be helpful for obtaining capital, a director should always ensure they can afford to guarantee the obligation. You should never sign a guarantee for an amount that would put you in a difficult financial situation. Solicitors such as https://www.parachutelaw.co.uk/director-guarantee will be able to tell you more about director guarantees.
When do you need to think about a director guarantee?
A director guarantee probably isn’t your first thought when considering the basic elements of starting a company; however, if you need to borrow money or secure premises, it may come up earlier than you expect.
These guarantees are quite common, especially amongst new limited companies, and don’t need to be as scary as they sound. A director guarantee can really help a small business secure finance, but it is essential you only guarantee what you can personally afford.