When a company director needs to borrow a large sum of money to invest in a business or to support rapid expansion, they may need to personally guarantee that they are able to make repayments from personal funds should the business be unable to repay its debts.
This is known as a director guarantee. It is not always mandated by a lender, but in situations where it is, signing a guarantee can provide the lender with the confidence that they need to loan the necessary funds to allow business growth to occur.
What you should know
A company director who signs a director’s guarantee is legally obliged to make the necessary repayments from their personal financial resources, should there be insufficient funds within the business to do so. A director must ensure that they have sufficient personal funds to act as a guarantor for their business prior to making such a commitment.
The legalities
To ensure that a director who is required to sign a director’s guarantee to secure business financing is of sound mind, fully cognisant of their responsibilities and not subjected to undue pressure, independent legal advice (ILA) must be sought from a firm such as Parachute Law. They will ensure that the director is informed of all the risks involved in signing the director’s guarantee and their responsibilities therein.
The director is advised to seek an impartial solicitor to provide the independent legal advice that is required but they may be asked to ensure that the solicitor that they choose is approved by their chosen lender prior to procuring their services. Individual lenders will have their own policies and procedures in this respect and this should be confirmed prior to seeking ILA.
Timescales
There is often a pressing business need to secure the requisite finances in a timely manner, so selecting a solicitor who can deliver the necessary advice quickly is essential. Many online solicitors will conduct this process by videoconference and use technology to obtain digital signatures to support the application for funding. This can be a far faster process than that which would be achieved by selecting a traditional high street solicitor.
Summary
Where a director is required to sign a director’s guarantee to secure a business loan or other financial investment, they are personally guaranteeing that they can repay using their own personal financial means, should the business be unable to make the required payments. To ensure that they understand all of the risks associated with the guarantee, they must obtain independent legal advice prior to signing, in some cases from a solicitor explicitly approved by the lender.