During the house buying and selling process, you may see a reference to a director’s personal guarantee. But what is this and when is it used? We’ll cover what you need to know in this article.

What is a personal guarantee by a director?

Lenders often require company directors to make personal guarantees when the company is borrowing a significant sum of money to buy a property via a mortgage or a similar asset funded by finance.

This is because it mitigates the risk for the lender. If the company defaults on repayments without a guarantee in place, the loan may never be recovered. However, if there is a personal guarantee, the lender can pursue the company directors who originally guaranteed the loan. If more than one director shared the guarantee, the lender is able to pursue either one or all for full loan repayment because the law holds each individual liable individually as well as collectively.

Director guarantees are common in the finance world, and most conclude without a problem for the signing director. However, it’s very important to get legal advice if you are considering this. As the agreement is a personal commitment, it would mean that you – as the signatory – would be personally liable for repaying the company loan if the company were unable to. This can be financially disastrous and can lead to bankruptcy when things go wrong. Companies do not always survive, but the director’s guarantee is a legal document and will be enforceable in court if things do go wrong.

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The importance of legal advice

A solicitor will provide guidance on a directors guarantee and check the details to confirm that the contract is fair as well as legally binding. They will also give advice on the implications of signing such an agreement and provide a steer on whether other options may be available. You can find out more at: Sam Conveyancing.

What are the pros and cons of this type of guarantee?

As with everything in business and finance, there are advantages and disadvantages to providing a personal guarantee to buy a company property or a similar asset. For example:

  1. It boosts the chances of getting vital finance for your business, which can make all of the difference to its success or failure.
  2. It may also give you the chance to buy a home that you can live in, depending on the kind of company it is.
  3. A director’s guarantee can improve the terms of your funding, as you are providing backing.

On the other hand, signing a personal guarantee means that your own finances are at risk, and the existence of the guarantee could make it harder for you to secure personal finance if and when you needed it. This could be particularly serious if you needed to apply for a mortgage of your own to buy a personal property, and it could mean that, if the company defaulted on its loan payments, the lender could come after your assets, including your home, cars and savings accounts.

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The lender could also come after you for these sums on an individual basis, even if more than one director signed the guarantee.

As with everything, good advice is essential to make the right decision, so it’s important to seek the right legal advice before you enter into any such agreement and to make sure you fully understand the terms, conditions and implications of signing a director guarantee on behalf of a company before you put pen to paper.