Quick answer
When you sign a personal guarantee, you, whether as a director, owner or someone else entirely, promise to repay the business's loan if the business does not. Lenders ask for one on most small business loans made to companies and trusts. It makes you personally answerable, and your own assets can be exposed even without any mortgage over them. Read the document closely, check whether it is capped, and get independent legal advice first.
Key points
- Expect to give a director guarantee on most small business loans
- If the business defaults, the guarantor is on the hook personally
- Some guarantees have no limit; others are capped
- Get independent legal advice before you sign
The lender’s side of the story
A company is a legal person in its own right. When it collapses, its debts normally stay with it, and directors are not on the hook just because they ran it. For anyone lending to a small company, that is a genuine worry, because small companies often own very little. A personal guarantee fills the hole by making the people behind the business answerable for the loan if the company cannot pay it.
Sole traders are a different case. There is no separate entity, so the owner already carries the debt personally. Guarantees are mainly a company and trust issue.
What you are usually promising
Most guarantees extend to the loan balance plus interest, fees and whatever the lender spends enforcing the debt. Many have no upper limit at all. Others are capped at a stated sum. Watch the scope too: some guarantees relate to one loan only, while an all monies guarantee reaches every dollar the business owes that lender, today or later. That distinction can be huge, so read the guarantee document itself rather than relying on the loan contract.
What is on the line
Should the business default and the lender call on the guarantee, the debt becomes yours. If you cannot pay, the lender can sue, obtain a judgment and enforce it against what you own personally. That can reach your home even though you never gave a mortgage over it. It is the reason unsecured business loans still carry real risk for directors, as explained in unsecured versus secured loans.
When someone outside the business signs
A lender will sometimes take a guarantee from a person who is not a director, often a parent or relative with property or a clean credit history, to help a young or credit-damaged business get a loan. That person carries serious risk and has no say in how the business is run. They should get their own legal advice, know the most they could ever owe and say yes only if they could actually pay it.
Ask before you sign
Is there a cap, or is it unlimited? Does it cover just this loan, or everything owed to this lender? Which costs are included? How and when can I be released? If a co-guarantor cannot pay, what happens to me? Must the lender go after the business and its assets before coming to me? Have your lawyer walk through each clause in everyday language.
Getting out of a guarantee
A guarantee normally stays in force until the loan is fully repaid or the lender lets you go. Resigning as a director does not end it on its own. When a business partner leaves, or a relative wants out of a guarantee signed years ago, the usual route is refinancing the loan without that person, which may mean offering new security or a stronger application.
Keeping the risk down
Borrow no more than the business can comfortably repay. Choose a capped guarantee when one is offered. Keep personal and business money apart. Revisit every guarantee whenever a loan is refinanced. And watch the business closely so problems get fixed early, well before a lender turns to the guarantors.
Property security and guarantees
Loans secured by property usually still include guarantees, but the lender relies mainly on the property, which can make the whole arrangement easier to understand because you know exactly which asset is at stake. These loans run from $20,000 up to $5,000,000, and approval does not wait on a valuation. Our guide to using home equity sets out the trade-offs.
An illustrative example
Two co-founders of an Adelaide design studio each signed an unlimited guarantee on a business loan. When one of them moved on, her guarantee stayed in force. Her former partner refinanced the loan using his own home as security, and she was released from her guarantee when the new loan settled.
Talk it through first
Take a minute to enquire and raise any questions about guarantees on your deal. There is no credit check when you first enquire, an experienced person reviews it, and your details are not auctioned to lenders. Understand before you sign.
Frequently asked questions
Can I get a business loan without a personal guarantee?
Rarely, for a small business. Some secured loans lean on property instead, but directors are normally still asked to sign.
Does a guarantee put my house at risk?
It can. If you are called on under a guarantee and cannot pay, the lender can use legal processes to recover from your personal assets, and that can include property.
What is a limited guarantee?
One with a ceiling: it covers up to a stated amount rather than the full debt plus all costs.
Can I be released from a guarantee?
Generally only once the loan is repaid or the lender agrees, often as part of a refinance. Stepping down as a director does not end it automatically.
Should my spouse sign a guarantee?
Only if they fully grasp the risk and have had their own independent legal advice. Think hard before bringing family into it.
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