Director Guarantees Explained

18th October 2021

If you’re a business owner or plan on starting a business, then you should know about director guarantees. 

Many people prefer to set up a limited company rather than being a sole trader of partnership because of unlimited liability. 

When you’re a sole trader or a partnership, you will be responsible for the payment of debts - whereas, with a limited company, you’re essentially shielded from any personal liability that the company may incur. 

However, if you plan on borrowing money for your business, the credit company may require you to take a directors guarantee. 

But what exactly is a director's guarantee? Should you sign one? When will it get called in, and what happens when it does? Read on to find out.

What Is A Director Guarantee?

A directors guarantee essentially makes you and the other company directors liable for any outstanding debts that the business may incur if the debt can’t be settled with business funds. 

A directors guarantee is often asked for by your bank or credit company when you apply for credit products. However, they may also be used by invoice factoring companies. 

On some occasions, a commercial landlord may ask for a director guarantee on the property lease to ensure all debts can be paid, and somebody is liable for the debt.  

You can find both unsecured and secured director's guarantees. Secured guarantees typically involve a fixed charge over a director’s or shareholder‘s home. 

An unsecured director guarantee will often be unsecured in terms of a business loan. This means that you won’t need to put your house down as collateral to get accepted for credit. 

However, the credit company may still apply to take charge of your property if the debt hasn’t been settled or no attempt has been made to settle the debt in a reasonable amount of time.

Should I Sign A Director Guarantee?

Although nobody will force you to sign a director guarantee, in some circumstances, you’ll benefit from doing so. 

For example, if your business needs to borrow money and one of the requirements is that you sign a director guarantee, then it’s most likely in your best interest to sign. 

However, if you’re not comfortable signing a director guarantee, you could look for credit providers elsewhere - although you may not be able to find a provider that will lend your desired amount to your business without some kind of director guarantee. 

If your current or potential landlord is asking you and the other directors to sign a director guarantee, you could look for other bases for your business if you don’t feel comfortable signing. 

A director guarantee is always optional, and you’ll never be forced into singing one. Be sure to do your research and check with your accountant before making any formal agreements that affect you and your business. 

Will The Guarantee Get Called In?

A director guarantee may get called into action if your business is expected to become insolvent in the near future. 

Your credit lender or landlord may want to ensure that a director guarantee claim has been put forward as soon as possible before the company goes under, so they have a better chance of retrieving the money owed to them. 

If your creditor or landlord has sent multiple requests for payment owed, then they could issue a statutory demand against you. If you don’t pay the requested amount within 21 days, then your creditor may commence bankruptcy proceedings, or apply for a CCJ. 

A CCJ (county court judgement) may also be a trigger for putting the director guarantee into action. 

If your creditor applies for a CCJ or a high court judgement, then they may send bailiffs or apply for a charging order. The charging order, if approved, will secure the debts against your home if there is enough equity.

Ultimately, you may have to sell your property after having items repossessed. 

If the terms and conditions of your original agreement state that they can activate director’s guarantees, then they most likely will.

A CCJ (county court judgement) may also be a trigger for putting the director guarantee into action. 

A director guarantee can come back to haunt you later on, so it’s always a good idea to negotiate and assess your options before signing a director guarantee agreement. 

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