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There are several situations where you may require funds to grow and expand your business. In that case, you might speak to a lender to obtain to business loan. Before lending money to your business, a lender will want proof that your business can repay the loan. Sometimes, you may need to provide the lender with property or assets, which they will hold as a form of security or collateral. Unfortunately, if your business fails to pay back the funds under the loan agreement, the lender will become the owner of your property.
One type of collateral that lenders often ask for is a director’s guarantee and indemnity. This article explains a director’s guarantee and indemnity and some considerations to take into account before signing the dotted line.
What Is a Director’s Guarantee and Indemnity?
A director’s guarantee and indemnity is a legal document which a business director signs and provides to the lender. Under this document, a director makes two important promises to the lender before receiving the loan.
First, the director guarantees that if the business cannot meet its obligations under the loan document, the director will step in and fulfil those obligations. This guarantee includes any obligation to pay money. Second, the director promises to pay for expenses that the lender incurs if the borrower cannot repay this amount. This may include:
- administrative costs;
- legal fees; and
- any costs the lender incurs in enforcing the guarantee and indemnity.
Generally, receiving a guarantee and indemnity from the director of the business is a condition to the loan. Hence, the director will have to provide it if the business wants to borrow money. However, before you sign a director’s guarantee and indemnity, there are some considerations to note. Specifically, you must:
- consider the nature of guarantee and indemnity;
- negotiate the terms of the guarantee and indemnity; and
- obtain independent legal advice.
Consider the Nature of the Guarantee and Indemnity
Contract terms in a director’s guarantee and indemnity place obligations on the director, as guarantor for the business loan. Generally, the terms in a guarantee and indemnity tend to be standard across the market. Nevertheless, it is essential to understand the nature of the guarantee and indemnity before signing.
The typical terms you will find in the guarantee will include that the guarantor:
- meets all obligations of the business if the business defaults under the loan. Generally, a lender is under no obligation to exhaust all its effort to recover money from the business before enforcing the guarantee and indemnity against the director;
- provides an indemnity to the lenders for all costs and expenses arising from lending money to the borrower; and
- abides by restrictions regarding their assets. For instance, the guarantor may need to seek the lender’s consent before selling or disposing of any property.
Likewise, there may be a term that states the guarantee and indemnity must remain in place despite:
- amendments to the underlying loan document;
- the lender assigning the loan to another lender; or
- the loan amount increasing, amongst other changes.
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Negotiate a Guarantee and Indemnity
Additionally, most terms of a director’s guarantee and indemnity are standard in the market and tend to be lender friendly. Nevertheless, you should see if you can negotiate the terms of the guarantee and indemnity. Ultimately, your ability to negotiate the terms will ultimately depend on how important building a relationship with you and your business is to the lender.
Further, two points you may consider negotiating are:
| Placing a limit on the guaranteed amount | Placing a limit on the guarantee period |
| Often, the amount that a director is liable for is unlimited. This is to capture all amounts the business is liable for under the loan agreement and any money the lender incurs in providing the loan. However, you may consider negotiating with the lender to limit the guaranteed amount to a specific amount. This will provide clarity on how much you could be liable for if your business is unable to repay the debt. | Standard terms in a director’s guarantee and indemnity will often state that the guarantee will remain until the lender is satisfied that the business owes no liabilities. You may consider putting provisions in the deed so that the guarantee is only valid while you are a director of the business. |
Obtain Independent Legal Advice
Finally, there are many technical legal terms and legal jargon used in a guarantee and indemnity deed. Therefore, it is good practice to obtain independent legal advice from a qualified Australian lawyer. Indeed, a lawyer can explain in detail your obligations under the guarantee and indemnity deed.
Obtaining independent legal advice essentially involves the lawyer discussing your obligations under the guarantee and indemnity with you. This includes the risk that you may lose your personal assets if the lender enforces the guarantee and indemnity deed and you cannot make the payments. The lawyer would then sign a certificate stating that they have provided you with independent legal advice about guaranteeing and indemnity.
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Key Takeaways
The director’s guarantee and indemnity is a type of collateral that lenders often require before lending money to a business. Under a director’s guarantee and indemnity, the director promises two things:
- to fulfil the obligations of the business if the business is unable to include any obligations to pay money; and
- to meet any costs or expenses associated with the loan document.
Before signing a guarantee and indemnity, you should understand the nature of the guarantee and indemnity you provide, consider negotiating it to place a limit on the guaranteed amount and period, and obtain independent legal advice.
If you need help understanding the terms of a director’s guarantee and indemnity, our experienced commercial lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A director’s guarantee and indemnity is a legal document which a business director signs and provides to the lender. Here, the director promises to fulfil the obligations of the business if the business is unable to include any obligations to pay money. They also promise to meet any costs or expenses associated with the loan document.
Before signing a guarantee and indemnity, you should first understand the nature of the guarantee and indemnity you provide. Second, consider negotiating it to place limits on the guaranteed amount and period. Finally, it is best practice to obtain independent legal advice.
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