Company finance

Hey Sandhya! About personal guarantees of all directors when a company takes a loan, here’s the usual practice and what you should know:

Personal Guarantee for Company Loans: Key Points

1. Is it mandatory to take personal guarantees from all directors?

• Not mandatory by law, but common practice for banks and lenders.

• Lenders ask for personal guarantees to secure the loan, especially if the company is newly formed, has limited credit history, or the loan amount is substantial.

• Sometimes, guarantees are taken only from majority or key directors/promoters, not necessarily all directors.

2. Why do lenders want personal guarantees?

• To ensure repayment security beyond the company’s assets.

• Personal guarantees create additional liability on directors/promoters, making them personally responsible if the company defaults.

• Helps in risk mitigation from lender’s perspective.

3. When might all directors be asked for guarantee?

• Small companies with few directors.

• Companies with weak financials or limited collateral.

• Loans with higher risk or unsecured loans.

• Sometimes lenders want uniformity in guarantees.

4. Alternatives / Negotiations

• Personal guarantee from key directors/promoters only.

• Corporate guarantee from holding company or group companies.

• Collateral security like property, assets.

Summary Table

Final advice:

• Check loan agreement and bank’s terms.

• Negotiate personal guarantees based on creditworthiness and relationship.

• Consult legal or financial advisor before signing guarantees.