Why do lenders ask for directors’ guarantees?

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Finance companies sometimes ask for a Director’s Guarantee when a company is seeking business finance.

The Director’s Guarantee gives the finance company additional security in case the business stops paying off the loan.

Director’s guarantees are generally asked for where the credit is not strong enough to stand alone. It could be that company accounts are not strong or, in the case of asset finance, an asset being funded has little resale value (IT is a good example). Some funders request Director’s Guarantees on all lending regardless of covenant.

Often the additional security is asked for when the borrower is a start-up, which would therefore not have enough of a business track record for the lender to have confidence in its future or viability, or when the borrower is an SME, which may not have many physical assets that could provide security.

Other evidence to support the case for asset finance might include records of turnover, the company’s other liabilities, low profitability and few shareholders.

The more risky the finance company decides the loan may be then the more likely it will be to ask for the additional “insurance” of a Director’s Guarantee.

Directors should understand that a Director’s Guarantee makes the director, or directors, personally liable for repayment of the company’s borrowing. However, if they refuse, then they are very unlikely to be granted the finance they are seeking.

Nevertheless, it is always advisable to get independent legal advice before signing any agreement.  The wording of any agreement can vary from lender to lender and the small print needs to be checked to find out what exactly the director is signing up to. Usually, the Guarantee will be specific to the loan for a particular asset, but it is important to check that this is the case.

However, a director who is confident of the strength of their company and its future, as well as its ability to repay the debt, should not be put off from agreeing to sign a Director’s Guarantee.