Six considerations for prospective guarantors
Whether you’re supporting a friend’s business venture, assisting a family member in securing a loan or offering a directors personal guarantee, here are six essential considerations for prospective guarantors.
Understanding the Commitment
Before agreeing to be a guarantor, fully understanding the commitment involved is crucial. This includes knowing the specific terms of the guarantee, the extent of your liability, and the potential financial consequences if the borrower defaults.
Financial Capacity
Assess your own financial capacity to fulfil the guarantee. Consider whether you have the means to cover the guaranteed amount without jeopardising your own financial stability. Be realistic about your ability to meet the commitment if the borrower is unable to.
Legal Advice
Seeking legal advice before offering a directors personal guarantee is a wise step. A legal professional can help you understand the legal implications of the guarantee, highlight potential risks, and ensure that you are fully aware of the legal responsibilities you are undertaking.
Relationship Dynamics
Consider the dynamics of your relationship with the borrower. While you may want to support them, it’s essential to recognise that financial transactions can strain even the strongest relationships. Open communication about expectations and potential challenges is key.
Impact on Credit Rating
Being a guarantor can have implications for your credit rating. If the borrower defaults and you are required to fulfil the guarantee, it may affect your ability to secure credit in the future. Understand the potential impact on your creditworthiness.
Exit Strategies
Discuss exit strategies with the borrower. Knowing how and when a directors personal guarantee may end is crucial. Some guarantees have specific conditions or a defined term, while others may require proactive steps to be released from the obligation.
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Becoming a guarantor is a generous and supportive gesture, but it comes with inherent risks.
