When a business is in a state of rapid growth, or an opportunity arises that is simply too good to pass up, funding needs to be found – and fast – to enable the business to exploit the opportunity. Often, businesses will look for investors or shareholders to contribute the funding that is necessary to allow this growth, but where this is not possible or desired, a business loan may be required.
Director’s guarantee
In some circumstances, the loan provider may require the company director to guarantee that they can afford to repay the loan from their personal finances should the business be unable to make the repayments. This process safeguards the lender and is known as a director’s guarantee.
In providing a director’s guarantee, a director will offer the lender reassurance as to their personal confidence in the stability of the business and the likely success of its growth plans. The lender will invariably perform affordability checks to ensure that the director’s personal financial circumstances can support any payments that may be required. Clearly, it is important that the director takes the time to perform all necessary due diligence on their business plans and personal financial position prior to signing the guarantee. This is because failure to make the necessary repayments could result in the lender taking court action against them personally to recover the debt.
Legal process
A director guarantee is legally enforceable, provided that the director in question was not subjected to undue pressure to sign the agreement, that they were not misled, that they were of sound mind, and that they fully understood their responsibilities.
To ensure that this is the case and to safeguard the lender, a director is usually required to obtain independent legal advice prior to signing a director’s guarantee. They should select an impartial solicitor who will explain the director’s responsibilities under the agreement, including outlining all of the risks that are involved in entering into it.
There tends to be some self-imposed pressure to take prompt action in order to allow business plans to be enacted in a timely manner. As a result, many company directors will opt to contact Parachute Law or other similar online legal professionals. Online solicitors are often preferred over a high street firm for performing work such as this. For a fixed fee, the necessary advice can be dispensed by videoconference and all legal documentation signed digitally.
This use of technology is often instrumental in allowing the director to access the funds that they need quickly and efficiently so that they can move forward with their growth plans.
Summary
Accessing additional business funds via a bank loan can require the company director to be held personally liable for repaying the debt should the business become insolvent. The company director must take the opportunity to seek independent legal advice and ensure that they are confident in their business plans and in their own ability to repay the loan prior to proceeding.