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Understand what a Directors’ Guarantee is and how it can benefit a start-up or business struggling with non payment issues.
What is a Directors’ Guarantee?
Start-up businesses often have limited trading history and therefore find it difficult to access credit. A Directors’ Guarantee gives certainty, and is often the demonstration of confidence needed to access credit. Also, businesses who extend credit to customers want to be sure that non-payment can be chased and monies recouped. A smart way to achieve this is to ask customers to provide a Directors’ Guarantee.
Aidan Squire, TM Law Solicitor says: “A Directors’ Guarantee should definitely be part of the contract process when your business provides a limited company with products or services. It’s a personal guarantee which ensures that the Director concerned is solely responsible for debt or debt owed by his or her company”.
As Aidan explains, a Directors’ Guarantee is needed because a limited company is regarded in law as a separate legal entity. This means that if your client’s company were to compromise with its creditors or go into liquidation, you might not get paid the whole of your debt or even part of it.
Anyone who trades as a limited company will want to be the contracting party to said limited company and so it is fundamental to any contractual arrangements, that the supplier must identify who they are contracting with. The company could be a start-up business, a small business that has been running for over a year or a business that has become more established. Along with this, it is important to ensure that the director(s) are personally liable, especially if you are going to extend credit in relation to the services you are intending to supply.
How does it affect a Start-Up?
- Finance is the main advantage. It allows access to rent properties or agreements with minimal credit ratings.
- Whilst cash flow is essential to small businesses, making sure that you get paid ultimately is more important.
- A straightforward approach is needed to new contracts if you are a supplier of goods or services.
- Many traders use a limited company as a trading vehicle although frequently this limited company simply is a sole trader who could effectively just be starting up his business.
What If Your Business is Struggling to Get Paid?
- A Directors’ Guarantee gives you the ability to make sure that wages get paid.
- It means that if the company fails to trade, you still have the ability to sue the directors for any unpaid payments such as wages.
- This then also ensures that you will still have the ability to sue the directors for reimbursement of any outstanding debts if the company fails to trade.
This leads onto the fact that when agreements are signed with limited companies where credit is to be given, not only should you ensure that there are specific conditions for payment of invoices, but all applicable directors should sign assurances from the director(s).
Aidan Squire: “A refusal by any director to agree to this should in any case send out warning bells ringing”.
Ensuring that you have adequate guarantees and sufficient assurances for the entrance of directors is something that can be put in place simply and cost effectively.
Peace of mind and expertise from a solicitor
At TM Law we’re experienced at supporting business owners and able to create a bespoke template for you and your firm – invest once and then continue to use as and when you need to. The added benefit to this process is that the template will also help build consistency and continuity within your company.
Directors’ Guarantee Template
From £150 + VAT
About TM Law – Specialist Commercial Law Solicitor
Based in Hockley, Essex, TM Law is a small and dedicated solicitors. With many years’ experience, helping business owners and local individuals with matters of commercial law, business continuity, personal injury, compromise agreements, employment disputes, debt collection, commercial disputes and much more.
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