Before taking on a directors personal guarantee, it is vital to ask yourself four key questions to understand the risks involved. Let’s find out more.
1. Are you prepared to be personally liable for the business’s loan repayments?
Personal guarantees tend to be used when the individual director offers their own assets as security, which can include the family home, car, and savings. As these types of assets can affect a director’s spouse and family, it is very important to seek legal advice first.
2. What are the terms of the directors personal guarantee?
The big consideration here is whether the obligation is shared between several directors or held by just one. This question defines who will be pursued for repayments if the business fails to meet its financial obligations.
3. Is there a limit on the financial redress a lender can seek?
In some cases, the personal guarantee will be limited to a certain financial value rather than the entire outstanding business debt; however, there may be costs attached. The details of the contract must be reviewed very carefully. Legal advice is always recommended before taking out a directors personal guarantee due to the inherent risks involved. Directors are regularly chased for outstanding sums, with the courts regularly seeing cases that pertain to these issues.
4. What is the liability to repay in time terms?
The passage of time sometimes means the personal guarantee expires; for example, if the lender demands repayment within five years and this time expires without the payment being made, it may be possible to cancel the contract. Again, this is a legal matter that may be very expensive and difficult to argue through the courts, so you should always seek legal advice first.
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