Let’s talk about Directors Guarantees from a lay point of view.
Firstly and fairly obviously, a Directors Guarantee is often requested by lenders to support a Limited Company’s intended borrowing. Putting it quite bluntly, if Directors were generally unwilling to sign such things, then a lot of corporate borrowing in the UK would simply not take place. If it did, it might well then carry higher interest rates and fees. The perceived risk of lending would be higher, as the Directors concerned would have little or no personal ‘skin in the game’.
Calling them ‘Directors’ Guarantees does something subtle but important. It makes them sound procedural. Like a standard part of doing business. But the language can obscure what is actually happening.
They very much are 'Personal' Guarantees and signing one really can be a life changing decision, either for good or for bad.
The decision behind the document
On the upside it may well enable your Company access to the funds it needs to compete and grow, or to acquire the assets it needs to do so, that is certainly true.
But you need also to consider why setting up a Limited company was a good idea in the first place. Amongst other things, it meant that your potential losses, if it all went horribly wrong, were limited to what you had invested in the Company. Your separate personal and family assets would not be involved.
If you sign a personal guarantee, all those personal and family assets may come back on to the table and be at risk.
Now, you may have full confidence in your abilities as a company director, but what if you are proved to be wrong? Or, more likely, what if something unexpected happens to your company’s market which is completely outside of your control? Your Company’s performance could dive, and it might not then be able to meet all its commitments.
In a worst case, alongside defaulting on its debts, one of those commitments might well be your own salary or dividends. If that happened, could you still then honour the Guarantees you had given without having to liquidate any personal assets?
Good question. It is also one that, in my experience, too few directors ask themselves before signing.
What the small print often contains
Most of the Directors Guarantee formats I see in the market are not just a promise to pay the company’s missing instalments or rentals when they fall due (although they are often portrayed as if that is all they are) they also often contain an ‘Indemnity’.This means that you also become personally liable for any additional costs or fees incurred by the lender in trying to obtain money from your company, or in trying to repossess any goods which might be involved. However, Personal Guarantees are not all exactly the same.
The best time to negotiate the terms of any personal guarantee is before entering into any agreement.
There is more room to negotiate than you might think
You should perhaps first find out if there are any lenders who would advance the funding on the basis of your Company’s own financial strength i.e. without the Directors having to put their own financials on the line.
If not, then would any funder consider moderating the risk - for example, by capping the amount they could pursue you for, at a level you could afford without too much personal financial damage? In other words, you would still have skin in the game and an extra inducement to manage the business responsibly, but your entire wealth would not be exposed.
Or, if there is valuable equipment involved, you could request a ‘delivery-up’ guarantee, meaning that in a worst case scenario, you could return the equipment in good working condition and the lender would accept that as settlement.
If you have co-directors and you are all being asked to sign guarantees, you might want to have the ‘Joint and Several’ clause taken out, because this makes you liable for their share of the responsibilities were they unable to comply.
There is a multiplicity of lenders in the financial marketplace with varying product types, rates of interest and different credit appetites — your balance sheet strength, projected cashflow, and the security you can offer means that not every lender will be right for your circumstances.
What to watch out for
So, don’t be pushed into Guarantees without stopping to think. Some signs to look out for;-
Anyone who belittles the possible impact of being pursued under a Directors Guarantee and Indemnity. With default interest rates being applied, it can all get very expensive, especially if legal costs start to be involved.
Anybody who asks you to sign a Directors Guarantee without recommending that you take legal advice first, as they are playing fast and loose with best practice.
Anyone who does not mention the need for Directors Guarantees until the last minute may be trying to ‘bounce’ you into them, as the need for funding may be becoming increasingly urgent, leaving no time for you to research further.
Worse still, those who might, without any prior notice of explanation, just include guarantees in a pack of e-documents all requiring an e-signature in order to release the funding.
A final thought
To conclude, as I said earlier, some form of Directors Guarantee may well be necessary, but a good Broker Intermediary should be able to help you navigate all this and find both an appropriate product and a fair and reasonable funding source for your Company’s particular circumstances. But before you get to that conversation, stop and think. A directors' guarantee is a personal decision — and it deserves to be treated as one.