A director’s guarantee is commonly used in business-to-business transactions. These agreements can be used to secure loans and mortgages. It offers a guarantee that the director of a company will pay any monies owed, even if the firm in question goes into liquidation or administration. The document helps both parties, offering one protection, whilst giving the other the chance to secure potentially lucrative deals and / or access capital. Conceived and managed properly, a director’s guarantee can help everyone involved, but it’s important to seek the right advice and to ensure that the guarantee is completed with qualified legal oversight.
The legal document.
The director’s guarantee is a form of personal guarantee. It’s most commonly used for small-to-medium, limited liability businesses undertaking a large business transaction. It is also used to help a company take out a loan, including a mortgage. This is because the owner of a limited business, unlike a sole trader or partnership, is protected from the debts of the company. In other words, the director has ‘limited’ liability.
In order to secure lines of credit or borrow money, the limited company may need to demonstrate that payments will be honoured, even if the firm enters into administration. The director’s guarantee is therefore used for specific business transactions or loans and does not apply to every transaction. A new director’s guarantee is needed for each new transaction or loan application.
Pros and cons of a director guarantee
There are many pros and cons to consider when it comes to a director guarantee. As a business entering a large contract, this guarantee can protect you when the money is not due to be paid upfront. Many small businesses suffer when another firm cannot pay what’s owed to them. As the buying company looking to secure a deal, it may be the only way to get the contract. For a business looking for capital, it might help with securing vital funding.
For the director, the risk of personal loss is not insignificant, and a director’s guarantee should only be drawn up when the director can comfortably foot the bill if the company cannot make payment. The good news is, however, that a director’s guarantee can include a capped amount, stating a limit as to the maximum sum for which the director is responsible if the company cannot make payment.
It’s important to understand that when these forms of guarantee are created with the help of legal professionals, they are more likely to be upheld in court. Although it is possible to get a guarantee of this nature drawn up without the help of legal support, those who sign declarations without it may find they cannot recoup the money owed to them.
Seeking legal advice
A solicitor can provide helpful information about this legal document and how it can relate to a specific individual and business. A solicitor can provide expert advice and support in drafting the document and will ensure that the agreement is watertight before it is signed. It’s essential to use a solicitor to draw up a https://www.parachutelaw.co.uk/director-guarantee director guarantee to ensure the director, and both businesses, are protected.
This type of guarantee is common in business-to-business transactions and can really help to keep things moving in the commercial environment. As with any legal document, the director’s guarantee is there to help both parties, but it only does its job properly when it’s completed with the help of a solicitor. A business should always seek out expert advice before entering into any kind of legal agreement, including a director’s guarantee.
