A personal guarantee is a legally binding promise by a person to repay a business's debt if the business can't. When a director signs one, they lose the limited liability a company normally gives them, at least up to the amount of the guarantee.
This article is general information only, not legal or financial advice. Before you sign any personal guarantee, get independent legal advice on your own document and situation.
Why lenders ask for a personal guarantee
Most commercial and SME borrowing in Australia goes through companies or trusts. Both have limited liability built in. The debts belong to the entity, not the people behind it.
That's a problem for lenders. If the company goes under, the lender's claim joins the insolvency queue with trade creditors and the ATO. A personal guarantee fixes that. It makes one or more people (usually the directors) directly responsible for the debt. If the business defaults, the lender can chase the guarantor personally without going through the insolvency process first.
For most unsecured commercial lending, a director's guarantee is standard. Even when property security comfortably covers the loan-to-valuation ratio, many lenders still want a guarantee to cover any shortfall if they have to sell.
Limited vs unlimited guarantees
This is the most important thing to understand before you sign.
An unlimited guarantee covers the whole balance: principal, interest, fees and the lender's costs of recovering the debt. There's no cap. If the business owes $800K and the lender spends $60K recovering it, an unlimited guarantor is on the hook for all of it.
A limited guarantee has a ceiling. A $500K loan might come with a $250K limited guarantee. The guarantor's liability stops at that figure, however big the total debt gets.
Lenders start with unlimited. You can often negotiate a limited guarantee on a well-structured deal with strong security, but you have to do it before you sign. Knowing the true cost of a business loan, including the recovery costs an unlimited guarantee can pull in, is part of working out what you're really taking on.
Joint and several liability
When two or more directors guarantee the same loan, lenders usually make it joint and several. That means each guarantor is liable for the full amount, not just their share.
The lender can go after any one guarantor for the whole debt. If one director goes broke, the other carries all of it. A handshake deal between directors to "split it 50/50" doesn't bind the lender. It only works between the directors, and only if it's written up properly in a separate agreement.
If directors own different shares of the business and you want liability split to match, that has to be written into the guarantee itself. Don't leave it to sort out after signing.
What assets are at risk
A personal guarantee lets the lender go after your personal assets if the guarantee is called. That includes:
- The family home, if you have equity in it or it's offered as extra security for the loan
- Investment properties, on the same basis
- Cash, savings and managed funds, which a court judgment and enforcement action can reach
- Cars and other assets you hold personally, which count toward the net asset position a lender looks at when working out what it can recover
Jointly owned property is more complicated but not automatically protected. A lender with a guarantee can go after your share of a jointly owned asset. The co-owner's share isn't directly at risk, but yours is.
Super held in a regulated fund has some protection under Australian law, but how much depends on the fund structure and the type of debt. Get specific advice if this applies to you.
All-monies clauses
Read the guarantee carefully for "all monies" wording. It's very different from a guarantee tied to one loan.
An all-monies clause means the guarantee covers everything the business owes that lender, on current and future loans, not just the one you're discussing today. If the business takes out another credit line with the same lender six months later, the guarantee may cover that too, automatically.
Where several loans are cross-secured under one banking relationship, the guarantee can cover the whole lot. The guarantor ends up liable for more than the loan they thought they were signing for.
This clause causes the most nasty surprises when a lender comes to collect. Check whether your guarantee covers one loan only or all monies before you sign anything.
Can someone else guarantee your business loan?
Sometimes, yes. A guarantor doesn't have to be a director. Lenders do accept a spouse, parent or business partner, most often when that person owns property the lender can take as security. Some lenders won't take a guarantor with no link to the business at all, so it cuts down the list of lenders.
A third-party guarantor carries the same risk as a director. If the business can't pay, the lender can come after them for the debt the guarantee covers.
What the lender will ask of a guarantor
- Their own ID and a statement of their assets and debts
- Proof they understand what they're signing, usually a certificate from a lawyer who gave them independent legal advice
- If their property is the security, a valuation and a mortgage over that property
Most lenders also check the guarantor wasn't pressured into it. That's one reason you can't skip the independent legal advice.
How a guarantor is released
A guarantee usually stays in place until the loan is fully repaid. The usual ways out are:
- The loan is paid off, or refinanced to a new lender without the guarantee
- The business gets strong enough that the lender agrees in writing to release the guarantor
- The guarantee was limited to a dollar amount or a time period, and that limit has been reached
If family is guaranteeing your loan, plan the exit from day one. A business loan with a clear release point is easier on everyone.
Questions to ask before you sign
These are a starting point, not a replacement for legal advice:
- What's the cap? Is the guarantee unlimited, or is there a dollar limit?
- Is it all monies? Does it cover future loans, or only this one?
- What sets it off? Look past missed payments. Breaching financial covenants, defaulting on other loans (cross-default) and material adverse change clauses all show up in standard commercial documents.
- Can it be released? On what conditions: full repayment, refinance, sale of the business?
- What happens if I resign as a director? Guarantees usually continue after you step down unless there's a specific release clause. You stay personally liable for debts taken on while the guarantee was in place.
- Is director's guarantee indemnity insurance worth a look? Some insurance covers the case where the business defaults and the guarantee is called. A business insurance broker can tell you whether it fits.
Independent legal advice
Most commercial lenders require a guarantor to get independent legal advice before signing, and to provide a certificate saying so. This makes it harder to challenge the guarantee later. Undue influence and poor disclosure are the most common grounds for challenge in Australian courts.
Treat this as more than paperwork. Finding a solicitor to sign the certificate as fast as possible misses the point. Sit down with a solicitor who has read the guarantee, explained what triggers default, confirmed how far any all-monies clause reaches, and walked you through what enforcement looks like in practice.
Where a broker fits in
A broker's work starts before the guarantee arrives. How the deal is set up (the type of loan, the lender and the security) decides what guarantee terms you'll be offered.
Lenders have different security rules. Some will accept a limited guarantee on a well-structured deal with strong security behind it. Others want unlimited guarantees as standard, whatever the deal looks like. The six categories of business lender in Australia each have their own appetite, and guarantee requirements vary a lot between them.
Where terms can be negotiated, a broker with a direct line to the lender's credit team can push for a limited guarantee instead of an unlimited one, a guarantee tied to one loan instead of all monies, and a release on full repayment or sale of the business. That happens with credit, before the documents are drawn up.
The guarantee is a legal document, and a broker doesn't give legal advice. Our job is to get the deal into the right commercial lending structure with the right lender, then send you to your solicitor before anything is signed.
If you're working on a commercial loan and want a broker's view on which lenders will take it, how to set it up and what guarantee terms are realistic before you get to the paperwork, the application form is below. Most enquiries get a response within four business hours.
Sources
- Directors' guarantees, exploding the myth, Finlease
- Limited guarantees in Australia explained, Sprintlaw
- Personal guarantees in business loans: what you need to know, OpenLegal
- What does it mean to give a personal guarantee? Coleman Greig
- Personal guarantees: what directors need to know before signing, Boss Lawyers