Undertaking a directors personal guarantee is legally binding, and comes with many implications.

A personal guarantee makes the director of a company personally liable if the business becomes unable to repay money or enters liquidation. It provides additional security to a lender, meaning that they are more likely to provide a loan.

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Credit Rating

Having a directors personal guarantee, in itself, does not impact credit score. So long as the business successfully makes all of its repayments, it should have no bearing on the director’s credit score. However, if the business defaults or is liquidated, the director then becomes personally responsible for those loans, and at this point, their credit score will be adversely affected.

If the director cannot repay the loan personally, they may then find their assets or bank accounts seized, or frozen. If these actions still do not meet the repayment of the loan, then at this point bankruptcy proceedings may be commenced against them. Bankruptcy has long-term implications which could result in a negative impact on credit rating for many years to come.

Legal Advice

Before undertaking a directors personal guarantee, it is essential that independent legal advice (ILA) is taken. In the case of taking out a mortgage and providing a personal guarantee, many lenders insist on an ILA meeting before agreeing to proceed.

This is because by undertaking a directors personal guarantee, the lender is put at risk in favour of the mortgage lender, due to the loan being secured against their personal assets. A director should always have expert, impartial legal advice before commencing with the guarantee, to confirm that they have understood the risks and implications involved in doing so.

The solicitor can then confirm to the lender that all appropriate advice has been provided. For information on a specialist who can provide an ILA meeting with a solicitor, either in person, or via a convenient video conference, visit https://www.parachutelaw.co.uk/director-guarantee.

Many firms can carry out this work under a fixed fee price, so the costs are fully transparent from the outset.

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Having a directors personal guarantee could mean that a company is able to access loans that were previously unavailable, or a lender may be more open to further borrowing because of the additional security. But because of the risks, it is essential that these are only undertaken when a company has long-term financial stability.

Russell

The writer of this article currently manages his own blog moment for life and spread happiness and is managing to do well by mixing online marketing and traditional marketing practices into one.

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