One of the main reasons people form a company is limited liability: the company’s debts are the company’s, not yours. A personal guarantee reverses that for a specific debt. It’s one of the most important documents you’ll sign as a director, and one of the most commonly signed without being read.
What is a director’s guarantee?
A guarantee is a promise by a person — the guarantor — to pay a debt if the borrower doesn’t. When a lender asks a company’s directors to guarantee a business loan, it’s asking them to stand personally behind the company’s obligation.
If the company defaults, the lender can demand payment from the guarantors. If they don’t pay, the lender can pursue their personal assets, subject to the terms of the guarantee and the law.
Why do lenders ask for them?
Because a company can fail and leave nothing behind. For small and medium businesses, the directors and the company are often closely intertwined, and lenders want the people making decisions to have a direct stake in repayment. Guarantees are standard on:
- Unsecured business loans and lines of credit, where there’s no property mortgage.
- Property-secured loans where the company borrows, even if property is also mortgaged.
- Trade accounts, leases and equipment finance.
It’s rarely a sign the lender thinks badly of you. It’s how small business lending is usually done.
The key terms to understand
Limited or unlimited?
A limited guarantee caps your exposure at a specific amount — for example, the loan amount plus costs. An unlimited guarantee has no cap. Know which one you’re being asked to sign.
This loan, or “all monies”?
A guarantee might cover only a specific loan, or it might cover all monies the company owes the lender now or in the future. An all-monies guarantee means a new facility down the track can be covered by a guarantee you signed years earlier.
Joint and several
If there are several guarantors, the guarantee is usually joint and several. Each guarantor is responsible for the whole amount, not their share. If your co-director can’t pay, you can be asked for all of it.
Secured or unsecured guarantee
A guarantee can be backed by security — for example, a mortgage over the guarantor’s home. That makes it much more serious: the lender has a direct route to that property.
Continuing guarantee
Many guarantees are continuing — they stay in force until formally released, even if the loan balance drops to zero for a period and is redrawn.
Release
How does the guarantee end? Usually when all guaranteed debt is repaid and the lender releases it. If you leave the company, resigning as a director does not automatically release you from a guarantee you’ve already given.
Independent legal advice
Guarantors are commonly required to get independent legal advice before signing. The lawyer explains the guarantee and certifies that you understand it. This matters even more when the guarantor isn’t involved in running the business — a spouse, a parent, a trust.
Use the appointment properly. Ask the lawyer to explain the worst case in plain language, in dollars.
Questions to ask before signing
- What’s the maximum I could be asked to pay?
- Does this cover only this loan, or everything the company owes you?
- Is it joint and several with the other directors?
- Is it secured over any of my property?
- What must happen before you pursue me rather than the company?
- How is it released when the loan is repaid?
- If I sell my shares or resign, what happens to the guarantee?
Our full list of questions to ask any lender covers the rest of the loan.
Guarantees and your personal credit
When you give a personal guarantee, the lender will usually check your personal credit file. And if the company defaults and you don’t meet a demand under the guarantee, that can affect your own credit record. See our guide on what a credit check is and when it happens.
Sole traders and partnerships
If you’re a sole trader, there’s no company between you and the debt — you’re already personally liable, so a separate guarantee is usually unnecessary. In a partnership, partners are generally personally liable for partnership debts. Guarantees are mostly a company issue.
Should I refuse to give a guarantee?
For most small business lending, a guarantee is a condition of the loan, and refusing usually means no loan. The better approach is to:
- Understand exactly what you’re signing.
- Ask whether it can be limited to the loan amount and this facility.
- Make sure the loan is for something that genuinely strengthens the business.
- Keep the loan’s term and exit plan realistic.
Talk it through
When our specialists present an option from our lending partners, we’ll point out any guarantee terms and explain them before you commit. Ring the Hotline, or request a call back.
Ready when you are. Ring 09 875 4577 or request a call back — a lending specialist will talk it through.