Quick answer
A personal guarantee is a promise by a director, owner or other person to repay a business's debt if the business does not. Most small business loans require one, even when no property is pledged. Guarantees can cover one loan or all debts, be limited to an amount or unlimited, and may be backed by a mortgage over the guarantor's property. Read it carefully and get independent advice.
Key points
- A guarantee makes business debt personally recoverable from you.
- Check whether it covers one loan or all present and future debts.
- Limited guarantees cap your exposure; unlimited ones do not.
- Family members who are not in the business should think very carefully before signing.
Checklist
- Which debts the guarantee covers
- Whether it is limited to an amount
- Whether it is secured by property
- Who else is guaranteeing, and how liability is shared
- How and when it can be released
- Independent legal advice obtained
Ask a business owner who has been through a failed business what they wish they had understood earlier, and the personal guarantee often comes up. It is usually a page or two in a thick loan pack, signed alongside everything else. Yet it is the clause that turns a company’s debt into your debt. This guide, part of our offer review series, explains what you are signing and how to protect yourself.
What a personal guarantee does
When you sign a personal guarantee, you promise the lender that if the business does not pay what it owes, you will. For a company, this bridges the legal separation between the company and its owners. For a sole trader, there is no separation to bridge, but lenders may still ask for guarantees from others, such as a spouse.
If the business defaults, the lender can demand payment from the guarantor and, if needed, take legal action to recover it. That can include pursuing personal assets and, in serious cases, bankruptcy proceedings. The Australian Financial Security Authority explains what bankruptcy involves.
Types of guarantee
| Type | What it means |
|---|---|
| Specific | Covers one named loan or facility |
| All moneys | Covers all present and future debts the business owes that lender |
| Limited | Capped at a stated amount |
| Unlimited | No cap beyond the debts covered |
| Secured | Backed by a mortgage or caveat over the guarantor’s property |
| Joint and several | Each guarantor can be pursued for the full amount |
An “all moneys” guarantee is particularly important to understand: if you later take another facility with the same lender, the guarantee may cover that too, without you signing anything new.
Why lenders ask for them
From the lender’s point of view, a guarantee aligns the owner’s interests with the loan and gives a fallback if the business fails. For unsecured lending, the guarantee is often the main protection the lender has. That is why “unsecured” business loans rarely mean that nothing personal is at risk; see our unsecured business loans review.
Questions to ask before signing
- Which debts does this guarantee cover: this loan only, or all debts to this lender?
- Is it limited to an amount? If not, can it be?
- Is it secured by my property?
- Who else is guaranteeing, and is liability joint and several?
- How do I get released, for example if I leave the business?
- What notice will I receive if the business falls behind?
Guarantees from family members
Lenders sometimes ask for guarantees from spouses, parents or other relatives, especially when property is in their names. These guarantors often receive no direct benefit from the loan and may not be involved in the business at all. Anyone in that position should get independent legal advice, separate from the borrower, and understand that they could lose their assets if the business fails. Many lenders require a solicitor’s certificate confirming the guarantor received advice.
Reducing your exposure
- Negotiate a limited guarantee capped at the loan amount or less.
- Ask for the guarantee to cover only the specific facility.
- Offer specific security instead, such as equipment, in exchange for a narrower guarantee.
- Keep guarantor numbers to those genuinely involved in the business.
- Diarise a review: as the loan is repaid, ask whether the guarantee can be reduced or released.
When things go wrong
If the business is struggling, talk to the lender early. Lenders generally prefer a workable arrangement to enforcing guarantees. Get advice from your accountant or a solicitor, and consider free help such as small business financial counselling. The Australian Small Business and Family Enterprise Ombudsman provides information and assistance for small businesses in disputes.
Leaving the business
Resigning as a director or selling your shares does not automatically end a guarantee. You need a written release from the lender, which it may only give if another guarantor or security replaces yours. Build this into any sale or exit negotiation.
How guarantees interact with security
A guarantee can be unsecured, relying on your general ability to pay, or secured by a mortgage or caveat over your property. A secured guarantee gives the lender a direct claim over that property if you cannot pay under the guarantee. Read our guide to security and GSAs for how the pieces fit together.
An illustrative example
A made-up couple run a bakery through a company. When they borrow for new ovens, the lender asks both directors and one director’s father, who owns his home outright, to guarantee. After advice, the father declines. The couple instead offer the ovens as specific security and agree to a guarantee limited to the loan amount from both directors. The lender accepts, and the father’s home stays out of it.
Questions about a guarantee in your offer?
Guarantees are a normal part of business lending, but the terms vary. If you want to understand your options, make one enquiry. There is no credit check when you first enquire, a real person reviews it and your details go to one lending partner rather than a list. Mention who would be guaranteeing in your enquiry, and always get independent legal advice before signing a guarantee.
Frequently asked questions
Why do lenders want personal guarantees for company loans?
A company's liability is separate from its owners'. A guarantee gives the lender a way to recover the debt from the people behind the company if the company cannot pay, which reduces the lender's risk.
Can I refuse to give a personal guarantee?
You can ask, but most small business lenders require one. Sometimes a lender will accept a limited guarantee, additional security or a smaller loan instead.
Does a guarantee end when I leave the company?
Not automatically. A guarantee usually continues until it is formally released by the lender, even if you resign as a director or sell your shares. Ask for a written release.
What is joint and several liability?
It means each guarantor can be pursued for the whole debt, not just a share. The lender can choose whom to pursue.
Should my spouse sign a guarantee?
Only after independent legal advice and a clear understanding of the risks. Lenders sometimes ask for guarantees from people who receive no direct benefit from the loan, which deserves particular care.
Is a director's guarantee the same as a personal guarantee?
Generally yes. A director's guarantee is a personal guarantee given by a company director for the company's debts. The name describes who gives it; the effect is that the director becomes personally liable if the company does not pay.
Sources and further reading
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