Director personal guarantees
Sun 10 December 2023
It is very common for company directors to be asked to give a personal guarantee. This is because lenders and other creditors may want to ensure that they have someone to turn to if the company fails to repay its debts.
Directors are most likely to be asked to give a personal guarantee when :-
- The company borrows money - the lender may ask the directors to provide a personal guarantee. This is because the lender wants to ensure that the directors have a personal stake in the company's success, and that they will be motivated to make sure that the company repays its debts.
- The company agrees a commercial premises lease - the landlord may ask the directors to provide a personal guarantee. This is because the landlord wants to ensure someone is personally liable if the company defaults on its lease payments.
What can directors do to protect themselves when they give a personal guarantee?
There are a few things that directors can do to protect themselves from personal liability :-
- Understand the risks - carefully consider the risks involved before they agree to provide a personal guarantee. They should also understand the terms of the guarantee and any potential consequences of default.
- Negotiate the terms - negotiate the terms of the guarantee with the lender or other creditor. They should try to get the guarantee to cover a maximum fixed amount of the company's debts, and they should make sure that the guarantee is limited in time.
- Seek legal advice - directors should speak get legal advice on personal guarantees. A lawyer will ensure you understand your rights and obligations, and may be able to negotiate the terms with the lender
- Investigate Personal Guarantee insurance - see below
Director Personal Guarantee Insurance
The cost of insurance will vary depending on a number of factors, including the director’s personal financial circumstances, the size and turnover of the company, and the amount of the personal guarantee. However, it is generally a relatively affordable type of insurance.
There are a few drawbacks to Director Guarantee insurance, including:
- Cost: can be expensive.
- Limited coverage: typically only covers the full amount of the director’s personal guarantee, up to a maximum limit.
- Potential for exclusions: There may be exclusions , such as for fraudulent or reckless behavior.
Alternative options instead of Director Personal Guarantee?
All alternatives, where possible, also have pros and cons. Options may include :-
- Issuing a second charge against company assets - a second charge is a type of security interest that ranks behind a first charge. This means that the second charge holder will only be repaid if the first charge holder is repaid in full.
- Securing the loan with parent company guarantees - If the company has a parent company, the parent company can issue a guarantee to the lender. This will ensure that the lender has two sources of repayment if the company defaults on its debts.
- Using invoice discounting - a type of financing where a company sells its unpaid invoices to a third party. The third party then takes ownership of the invoices and is responsible for collecting the payments.