When do lenders require a director guarantee?

For startups or businesses still in their infancy looking to push to the next stage, a cash injection is often essential for purchasing necessary equipment, marketing or even staff.

Why do lenders ask for this?

It’s understandable that lenders might have concerns about lending money to new businesses who don’t have accounts from the last few years to show. To mitigate this risk, lenders sometimes require the director to sign a director’s guarantee, meaning that they’re personally liable for repayment of debts in the event that the business is unable to repay.

From the lender’s point of view, they understand that as the director of a limited company, a person is already fully committed to the business and that being a personal guarantor shouldn’t be a problem since that person is already trying their utmost to turn the business into a success. Of course, being a limited company director isn’t a decision to be taken lightly – plenty of information is available on the government website for anyone considering a startup.

No matter how confident you are in your business, always be mindful that once a personal director’s guarantee has been signed, the lender could exercise their right to pursue their debts that way. For this reason, always seek specialist advice on signing a guarantee, from experts such as Parachute Law, to ensure you have fully understood all of the small print relating to the guarantee and have given yourself as much protection against personal liability as you possibly can.

Is this always necessary?

Not necessarily. A business with several years of accounts showing that they’re in good financial standing is less likely to need to sign a director guarantee.

Additionally, the newly established Recovery Loan Scheme means lenders do not have to request a director’s guarantee for loans under £250,000, either.

It can also be wise to look into purchasing insurance to protect your personal finances in the event of a claim – again, seek expert advice to ensure the policy is the right one for you.