The impact of Coronavirus is being felt by businesses across the UK, not least by small firms struggling with matters of cash flow. Understand what a Directors’ Guarantee is and how it can mitigate against the challenge of customer non-payment.
What is a Directors’ Guarantee?
Businesses who extend credit to customers want to be sure that non-payment can be chased, and monies recouped. This is done by asking customers to provide a Directors’ Guarantee to ensure confidence.
In the past, many small firms have failed to include a Directors’ Guarantee as part of the contract process. Frequently the process was simply overlooked, and in some cases the business owner felt uncomfortable making the request. But, with the Coronavirus crisis comes an opportunity to improve systems and processes and safeguard financial security more thoroughly. Our advice is that when your business provides a limited company with products or services a Directors’ Guarantee should always be requested. Why? A Directors’ Guarantee is a personal guarantee which ensures that the Director concerned is also responsible for a debt owed by his or her company.
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.
What If Your Business is Struggling to Get Paid during the Coronavirus Crisis?
- 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, Solicitor at TM Law says:
“So many small businesses have been left high and dry, unable to get invoices paid in the midst of the coronavirus crisis. To safeguard against this happening again, a Directors’ Guarantee should be an essential tool of the trade for SME business owners.
Of course, large corporations may refuse to provide a Directors Guarantee. But, when you start trading with a small to medium sized limited companies, my advice is to make a Directors’ Guarantee part of the new client sign up process.”
A refusal by a Director to agree to a Directors’ Guarantee should set alarm bells ringing.
At TM Law we provide the Essex based business we support with a Directors’ Guarantee template. Designed for your business, it’s a document you can use regularly as post-coronavirus new business is won and trading begins to return to normal.
It will build consistency and continuity within your company and ensure that you can get back to the task of growing your business again, with confidence that non-payment is under control.
Directors’ Guarantee Template
From £180 + 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.