What Are the Risks of Personal Guarantees by Directors?
Guaranteeing a company loan will likely affect your personal borrowing capacity and risks affecting your credit rating. If you are unable to pay you risk losing your personal assets and being made bankrupt.
- Check how much you are guaranteeing; is it a fixed sum or all possible losses?
- If the company misses a payment, can they come to you for the missed payment or the full loan amount?
- Check the trigger; when and why can the lender demand repayment from you personally?
- Check if the guarantee has a time limit; can it be terminated when the debt is repaid, or you are no longer a director?
- Check if there is a grace period; will they come after you as soon as a payment is missed, or will the company have a notice period in which to raise the funds?
What is a Directors Guarantee?
Director Guarantees are required by lenders when granting a loan to a limited company. The directors pledge to personally repay the debt from their own pocket if the business fails to do so.
If you are called on to repay the loan and cannot afford to do so, the lender may take you to court to secure the debt against your own home.
Why take the risk?
If you have your own finances in order but you're setting up a new company or expanding a smaller one, a personal guarantee is a great way to reassure lenders to release funds. As long as you keep on top of repayments from the company, there is no need for the director guarantors to pay out of pocket.
Like any loan or mortgage, the terms vary on a scale of risk. The greater the risk to the lender, the greater the liability they will want to stick to you personally.
It's best to shop around and see what personal guarantees are required by different lenders. The safest option for you is a limited personal guarantee with a fixed sum, a reasonable trigger and notice period, and a clearly outlined right to terminate the guarantee (usually on repayment or a fixed length of time after resignation as director).
5 risks of personal guarantees by directors
Before you can proceed with a personal guarantee and get the funds from your lender, you must have Independent Legal Advice from a specialist solicitor who will explain the risks and implications unique to the specific agreement the lender has drafted.
More importantly, they are familiar with many director guarantee agreements, will advise you if this agreement is not favourable, and can help you negotiate better terms for an additional fee.
If the terms place a too-unfair risk on you personally, or negotiation is not a viable option, they may recommend you seek a new deal with a different lender.
The advice you receive will vary specific to the unique terms of your agreement.
- 1
How much is the director guaranteeing?
The total amount the director is liable for will be different depending on the mortgage lender and can be (from best to worst):
- Fixed Sum - the current loan amount at the time of repayment.
- Current loan plus costs - the current loan amount at the time of repayment and the lender's costs, fees and expenses.
- Current loan, further borrowing and costs - this covers any future borrowing with the same lender.
- All possible losses - this is the worst mortgage term as it exposes the director to all possible losses that could possibly be incurred by the lender as a result of transacting with the borrower.
- 2
What is the risk if the company misses a mortgage repayment?
In a typical residential mortgage, like the one you may have on your home, there is generally more leniency from the lender when it comes to missed payments (although it's never a good idea to miss a payment if you can possibly help it).
There is much less understanding from the lender on a company loan, however. If your company misses a payment, the lender can take action according to the terms of the guarantee. They may call on the director guarantor:
- for the missed payment - the lender just requires the director guarantor to pay the missed mortgage payment; or
- for the whole debt - this would mean the whole debt would be repayable, and as we've seen from section 1, this could be just the mortgage debt, or it could be all possible losses.
Example of a director's guarantee clause recalling the whole debt
"In consideration of the Lender entering into the Finance Document, each director guarantor guarantees to the Lender to pay on demand the Guaranteed Obligations."
An on demand clause allows for the mortgage lender to call upon the mortgage debt on demand at any time, even if the Borrower hasn't breached the mortgage lender's terms and conditions.
Download your Directors Guarantee Mortgage Terms
- 3
What is the key trigger for the directors to repay the mortgage?
These are key triggers whereby the directors would be required to repay their mortgage obligation to the lender (from best to worst risk).
- A missed payment by the company which has not been paid when the lender has notified them of the missed payment;
- A single missed payment (with no notification required);
- Any breach of the mortgage terms by the company (no matter what the breach was); or
- No trigger required. The mortgage lender can call in the guaranteed mortgage obligation 'on demand', whenever it wants.
What is the legal definition of 'On Demand'?
"must be repaid on the demand of the lender". This means the lender can demand repayment without any specific reason or trigger.
- 4
How long does the Directors Guarantee last for?
The director's guarantee starts from the date it is executed; in a property purchase, this is on completion. It will end according to the specific terms of your guarantee, either:
- when the debt is repaid;
- when cancelled by the director;
- when cancelled by the lender; or
- There is no right of termination. The personal guarantee lasts forever, even when the director is no longer an owner, director, shareholder or officer of the company.
- 5
How long is the notice or 'grace' period?
Most director guarantees are drafted such that lenders are not required to write to the Director to give them notice of their intention to call upon the guarantee.
Most of the lenders are also not required to give the director any "grace period", i.e. any time before payment needs to be made.
This means that if the company failed to make a payment when it was due by midnight last night, they may request full payment from the director today.
21 days after the company and the director both fail to make the payment, the mortgage lender can petition for the director's bankruptcy.
Can a company use personal guarantees by multiple directors?
You can share responsibility among several directors. All directors will need to get personal guarantee independent legal advice, book now:
Please fill in the form below for one director only. £299 INC VAT | Please fill in the form below if you are the first of multiple directors. £299 INC VAT + | Please fill in the form below if you are an additional director. £180 INC VAT |
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Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
