Manager - Finance & Accounts
58384 Points
Joined June 2010
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?
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Not mandatory by law, but common practice for banks and lenders.
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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.
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Sometimes, guarantees are taken only from majority or key directors/promoters, not necessarily all directors.
2. Why do lenders want personal guarantees?
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To ensure repayment security beyond the company’s assets.
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Personal guarantees create additional liability on directors/promoters, making them personally responsible if the company defaults.
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Helps in risk mitigation from lender’s perspective.
3. When might all directors be asked for guarantee?
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Small companies with few directors.
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Companies with weak financials or limited collateral.
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Loans with higher risk or unsecured loans.
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Sometimes lenders want uniformity in guarantees.
4. Alternatives / Negotiations
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Personal guarantee from key directors/promoters only.
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Corporate guarantee from holding company or group companies.
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Collateral security like property, assets.
Summary Table
Scenario |
Personal Guarantee from All Directors Needed? |
New/small company, unsecured loan |
Often yes |
Established company, secured loan |
Maybe no |
Loan policy of bank/lender |
Varies by lender |
Large loans |
Likely yes |
Final advice:
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Check loan agreement and bank’s terms.
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Negotiate personal guarantees based on creditworthiness and relationship.
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Consult legal or financial advisor before signing guarantees.