What is a director guarantee?
The purpose of our blog this week is to help you understand some of the terminology used and also the options that are open to you.
One of the options is a Director guarantee these can be used to leverage payment from a business, the biggest benefit of this guarantee is to creditors.
Definition – “A director guarantee is a legal commitment for the director to pay if the company doesn’t under the terms agreed, this can be for a loan, lease or for other financial arrangements and contracts”
This type of agreement makes the director of the business personally liable and puts their personal assets at risk if the businesses cannot meet their financial obligations.
When is it the best option to ask for a director to be guarantor?
- If you are intending to do business with a company that has recently started trading or has very limited trading history.
- If you are aware that the company doesn’t have assets of its own that you could claim against should you need to.
- If you are want to continue to work with a company even though they do not pass your initial credit checks and procures for a new account
The Risk is placed firmly on the director as they are effectively putting their personal belongings on the line. The director guarantee is a win win situation for the creditor as you are guaranteed assets to be able to claim against.
If you are going to obtain a director’s guarantee there is some due diligence you need to do:
- Obtain home address, date of birth and full name of each director.
- Ask for a recent utility bill and photo ID to confirm they are who they say they are
- Carry out a Land Registry search on their residential address to see if they own the property and if there is likely to be some equity in the property ( there is no point in getting a personal guarantee if they don’t have any personal assets to satisfy the guarantee if needed)
- Ideally, you want to ensure they get independent legal advice before signing a personal guarantee and you receive a letter from the solicitor concerned confirming that they have received this advice. If you don’t have this, you may have difficulty enforcing the guarantee.
Joint and several liability for director guarantors
If you are in a situation where a business has more than one director, you should ask for the directors to sign for joint and several liability, this means that all directors are jointly liable for any company debt as well as being individually liable.
This would enable a creditor to claim against one or all of the directors named in the agreement. It will be worth ascertaining which of the directors has the most assets and pursuing them for the full debt. Once the debt has been repaid that will be the end of the matter.
Directors guarantees are difficult to obtain for general trade debt, therefore an alternative would be to ensure you get payment in full in advance of supplying any goods or service. If the nature of your supply means that the value your customer would need to pay is unknown until after the goods or service has been delivered, you may want to consider your customer pays an unallocated payment on account of the estimated weekly balance (including VAT) and then just pay invoices on receipt.
If you are looking for help with your process and procedures for setting up new clients and ensuring you have the right information to make an informed decision get in touch.
