The Director Guarantee: When It Is Required And How It Works

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If you have a limited company and need additional funds in order to grow, then you may come across the term Director Guarantee.

Also commonly referred to as a Directors Personal Guarantee, this is a way to access loans that will be secured by a personal commitment as a director of the company, rather than on the assets of your business.

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When Is A Director Guarantee Required?

When you set up a limited liability company, one of the key advantages is that you are protected from having to pay creditors from your personal funds should the business fail. This is a useful resource for those looking to understand more about setting up and running a limited company in the UK.

If you need to borrow money from a lender such as a bank or business finance provider, however, then you may find it tricky to access the funds you need without putting your own finances on the line as security. A Directors Guarantee will stand even in the case of insolvency, so you should only enter into a Director Guarantee agreement if you are wholly confident in your business strategy.

That’s because the purpose of a Directors Personal Guarantee is to provide your lender with the added assurance that they will be able to recoup the amount they plan to lend you for your business. As a director of your limited liability company, you will agree to cover the loan repayment from your personal funds and assets in the event that your business is no longer able to do so. The good news is that, as well as making it easier to secure finance for your business, taking out a Directors Guarantee will often make it easier to be accepted for future lending.

Think Carefully First

As the recent Covid pandemic has proved, even apparently robust businesses can be threatened if events arise which are beyond their control. Therefore, it makes sense to think carefully and seek expert insights and information regarding director guarantees before taking the plunge. That being said, many directors have successfully scaled their businesses after using a Directors Guarantee to secure the funding they needed to do so. There is also a type of insurance that you can take out to cover any sum that you may be called upon to pay under a Directors Guarantee, which can be a worthwhile safety net.

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Lenders will typically ask for a Directors Guarantee for a business loan, asset leasing agreements, invoice finance arrangements, property leases, and supplies for trade. The amount for which the director will be liable will vary, too, from the entirety of the outstanding loan to as little as a 20% share. Lenders also view the willingness to back the agreement with personal assets as a good indicator as to how confident the company owner feels about their enterprise, which in turn helps to inform their risk assessment.