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Thinking About Signing a Director’s Guarantee? Read This First

If your company is applying for a lease or loan then signing a Director’s Guarantee may be requested. While this may boost your business’s credit rating, it has a number of legal implications that you must be aware of.

What is a Director’s Guarantee?

A Director’s Guarantee puts your personal assets on the line if your company fails to pay its due debts. You will generally be asked to sign onto a guarantee if your company has limited assets. While it can get you quick money needed for your expansion, or overall business operations, you need to think of the long term consequences. In the worst case scenario, the creditor can have the court seize your personal assets, such as your home, to pay what the company owes.

Things to Consider:

In some circumstances, signing a Director’s Guarantee may be your only option. It is therefore critical that you know what you are signing up to. Ask yourself the following questions:

What is the total amount of money that my business is applying for?

The first thing you need to consider is the total amount of money that you are after. Based on your business’s current financial position, will the business be able to pay off this debt without any difficulty?

What are the chances that my company’s finances will take a turn for the worst?

Here you need to assess your business’s trajectory. Think about the risk factors that you expect to face in the future. Will these events impact your ability to repay your debts? If the answer is yes, then maybe you should not sign a Director’s Guarantee.

Am I financially able to pay for the debt if the circumstance arises?

In addition to your business’s financial status, you also need to assess your own finances. If the business is unable to pay, can you afford to pay off the debt that you are applying for? If it works out to be a small percentage of your assets then the risk is low. However, if it is worth the price of your house then you may need to re-evaluate.

Do the benefits of signing the Director’s Guarantee outweigh the risks?

Think about the benefits that the loan will bring to your business. Test whether these advantages outweigh the risks mentioned above.

Leaving the Company

Down the track, you may find yourself leaving the business for a number of reasons, such as overbearing debts. You must keep in mind that you are not automatically released from the guarantee if you cease to be the director of the company. On the contrary, you may still have to pay off the debt through your personal assets.

It is therefore critical that you read the terms of the Director’s Guarantee very carefully. Understand whether or not your liability will end if you are no longer the director of the company. It is generally suggested that you sign onto a guarantee that ceases to recognise you as liable if you are no longer with the company.

Speak to a Lawyer

As seen from above, there are a number of risks associated with signing onto a Director’s Guarantee. While the boosted credit rating may be favourable in your eyes at that point in time, you need to think of your financial wellbeing in the future. Read the terms carefully and try to find a creditor that will lend you money without this condition. They usually charge a higher interest rate, since the risk is higher, but this is generally the safer option.

However, if the succession of your business solely relies on you signing onto a Director’s Guarantee then be aware of your risks. Speak to one of our capital raising lawyers for advice on the matter.

Don’t know where to start? Contact us on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.

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