When you start up a company, there’s a lot to think about – and everything often needs doing all at once.
The first few months and years are a critical and sometimes chaotic time in building your business. Time can whizz by at breakneck speed when you’ve got so much to juggle. Finding and leasing your premises, maybe hiring your team, dealing with HR and financial matters and trying to get your head around marketing all takes time and a lot of energy. With so much going on, it’s often easy to overlook some of the fine print in the commitments you find yourself signing up to along the way – until it’s too late to do much about it.
Limited companies have different lease liabilities to sole traders
It’s worth knowing early on your liabilities as a company director, particularly when it comes to leasing. You may need to go out to get credit, for example, to enable you to lease equipment like a printer/copier or other office equipment. Sole traders are currently afforded automatic protection under the Consumer Credit Act 1974 for up to £25,000, including the VAT of any lease commitment. They will also have some protection from the FCA.
Sole traders also enjoy the added protection of a cooling-off period on each agreement. Cooling off periods vary but are usually around 14-21 days. This means once you sign up for a finance or lease agreement, you will have some breathing space to think again about your decision and whether, in the cold light of day, it is the right move for your business or organisation.
So why do you need to provide a director’s guarantee to lease equipment?
However, this same protection – the cooling-off period, the Consumer Credit Act and FCA protection – does not apply to limited companies’ directors. That’s why a finance company will usually ask you for a ‘director’s guarantee’. A director’s guarantee is an undertaking that allows lenders to recover unpaid company debts from directors personally. In short, that means if anything goes wrong with your business, you are personally liable for the outstanding finance or lease payments. At Fair Contract Associates, we have seen limited company directors fall foul of this time and again.
Why do the liabilities vary?
This might seem a little unfair, but when a limited company takes out finance or a lease, it is classed as a business to business transaction. The law says that you should know what you’re doing when you take on that responsibility as a company director. The onus is very much on you to make sure you have read and fully understood exactly what it is you’re going to sign up to before you get anywhere near the point of signing.
The finance companies should carry out due diligence procedures before providing finance to you. Sadly, and often despite claims to the contrary, this is sometimes little more than a credit check and confirmation you have the equipment. Indeed, with leasing, very few leasing companies’ due diligence extends to you understanding the consequences of the fine print or the full extent of the commitment you are entering into. And when this comes to upgrading to a new agreement, the checks tend to be even scanter.
Sadly when people are inexperienced in business, just starting on their own, or simply too bogged down with too many other things going on in their business at the time, it’s easy to gloss over the detail in a race to get the equipment, the car, the machines you need and your business up and running.
Finance has become such a way of life for everyone now that we rarely find time to look through the small print while we know we should. And even when we do, it can sometimes feel impenetrable to the layman. Before you know it, you’ve signed away all your rights. That’s why Fair Contract Associates provide a low-cost contract checking service, so our clients have peace of mind they know precisely what they’re getting into before they sign anything.
Bankruptcy is just around the corner
Bankruptcy sounds dramatic, but it really isn’t far from the truth.
Take this scenario, for example. You lease a photocopier. The terms of your agreement add up to a total of £35-40k over time. That’s manageable, though, because you’re making monthly payments over five years. However, if your business folds within the first year, you’re still going to have £28k or more to pay – and no one else will be responsible for paying that other than you. Add in the cost of the maintenance contract you took out too, and you’re looking at another £5/10/15k or more on top of that.
We often help people stuck in unfair contracts to renegotiate better terms, but even the best legal team in the world will not be able to get you out of this one. If you don’t have or can’t get the money to cover it, you’re heading towards bankruptcy. This is a worst-case scenario, but it happens often. And we’ve received a worrying number of enquiries on this exact matter recently – where directors are literally on the edge of being tipped over into bankruptcy.
There is not enough training available in what to look out for, and respectable businesses and organisations get caught out by contract terms all the time.
If you want the confidence that you’re signing up to a fair deal, schedule a call with Fair Contract Associates today and get the peace of mind you deserve. In the meantime download our free guide to the 5 Golden Rules You Need to Consider Before Leasing Your Next Copier.