Directors Guarantees – How they work and why they protect you against bad debts
After being in business myself and helping businesses with legal advice for nearly two decades now, it still breaks my heart seeing great entrepreneurs get buried in bad debt and lose everything.
And not because businesses shouldn’t fail. No, I know the game – some make it and some don’t. What really bugs me is the fact that many times businesses could have survived if the owners and directors had prepared a few legal documents to protect themselves. So many times the bad decisions of partners mean great entrepreneurs end up losing their business and life’s work because of others don’t pay.
One thing you can be sure of is that it happens way more often with small businesses than with big ones – the little guy just can’t afford the legal costs (or thinks that it doesn’t apply to him).
That’s why today, I am about to give you one tool that will help your business thrive by avoiding bad debt and protect your personal finances and assets.
This is especially important if you work with other small businesses that might not be able to prove their assets and ability to pay you.
Now, let’s talk legal….You are going to be surprised how a Director’s Guarantee protects you from bad debt.
What is a Director’s Guarantee?
A Director’s Guarantee is a legal document that makes sure you get paid. The owner or director of the business you are working with personally guarantees with their assets that payment will be made to you.
This practice is common in obtaining loans for small businesses, insurances or leases. However, if you feel that the business you are working with is insolvent or unreliable, you are within your right to ask for a Director’s Guarantee.
Do you need one?
You don’t need one always, and not everyone is willing to sign it either. For example, if you have worked with a company many times and they have the habit of late payments or you had to deal with bad debt from them; it is strongly advisable to obtain a Director’s Guarantee.
Director’s guarantees are only needed when the company you are working with is a corporation. A corporation is legally separated by its owners and directors and there a director’s guarantee is required. However, if you work with a sole trader or a partnership entity, you don’t need it as they are already personally liable for the debts of their companies.
How can a director’s guarantee help?
A Director’s Guarantee is a legal document that doesn’t lose power even when the director leaves the company. It is your personal security against a payment that needs to be made by a company.
Director’s Guarantees are very common for start-ups that don’t have assets or need substantial loans. Don’t be afraid to ask for such a legal guarantee when it’s necessary. If the company doesn’t pay, you will be able to apply in court and get the director’s personal assets and property seized until the debt is repaid.
Director’s Guarantees are especially important for small businesses where every penny matters. They protect you from bad debt and bankruptcy of the company. Even then, the director needs to pay you.