Personal guarantees on business loans, explained

Trading through a company is often described as limiting your liability. For borrowing, that limit usually disappears the moment you sign a personal guarantee. This entry explains what a guarantee commits you to, the clauses that matter most and how to approach one with your eyes open.

Why do lenders ask for personal guarantees?

A company or trust is a separate legal entity. If it fails, its creditors generally can’t reach the directors’ personal assets — unless the directors have agreed otherwise. A personal guarantee is that agreement. It gives the lender a second source of repayment and, just as importantly, keeps the owners personally committed to the business’s obligations.

That’s why guarantees are standard even on loans called unsecured. For unsecured business loans, the guarantee often is the lender’s main protection beyond the business’s own cash flow.

What does a guarantee actually commit you to?

Loan documents usually include a combined guarantee and indemnity. In plain terms, the guarantor typically agrees to:

• pay any amount the borrower owes and fails to pay, when the lender asks;
• cover the lender’s costs of enforcing the loan and the guarantee;
• remain liable even if the lender gives the borrower more time or changes some terms (within what the document allows);
• compensate the lender directly (the indemnity) even if the loan agreement itself proves unenforceable.

What does “joint and several” mean?

When two or more people guarantee the same loan, the guarantee is usually joint and several. The lender can pursue all guarantors together, or any one of them for the whole debt. If your co-director has no assets and you do, the lender can come to you for everything. You would then have a right to seek a contribution from your co-guarantor, but that’s a separate — and often difficult — process.

Which clauses deserve the closest reading?

Clause	Why it matters
Limit of liability	Is it capped, or unlimited plus costs?
All-moneys clause	Does it cover only this loan, or every debt the borrower owes the lender now and in future?
Continuing guarantee	Does it survive refinances, variations or increases?
Release conditions	What has to happen for you to be released?
Security for the guarantee	Is your home also mortgaged to support it?
Notice requirements	How and when must the lender demand payment?

The all-moneys clause is the one most people miss. It can extend a guarantee well beyond the loan you think you’re backing.

Should guarantors get independent legal advice?

Many lenders require it, particularly for guarantors who aren’t directors — a spouse, a parent, a business partner’s family member. Even where it’s not required, it’s sensible. A lawyer acting only for you can explain what the documents mean for your personal position and, sometimes, negotiate a limit or narrower scope.

It’s also worth knowing that commercial loans, as ASIC notes, carry the lowest level of legal protection of any lending. Small business loan contracts are covered by unfair contract terms laws, but that doesn’t replace reading what you sign.

Are there alternatives to a personal guarantee?

Options are limited, but they exist:

• Property security may reduce the lender’s reliance on the guarantee, though most still require one.
• A limited guarantee capped at an agreed figure.
• Asset-specific finance, such as equipment finance or invoice finance, where the asset carries more of the risk.
• Larger deposits or lower loan amounts, which reduce the lender’s exposure.

If a guarantee is a sticking point, you can talk to a specialist about which lenders offer more flexibility.

Who else might be asked to guarantee?

Lenders sometimes ask for guarantees beyond the directors:

• Shareholders who aren’t directors, particularly major ones.
• The trustee company and individual beneficiaries where a trust is involved.
• A spouse or family member who owns property offered as security.
• Related companies in a group structure.

Non-director guarantors are often less familiar with the business, which is why lenders are careful about their independent legal advice. If you’re asked to guarantee someone else’s business, it’s reasonable to ask for financial information about it before you sign.

Terms used in this entry

• Guarantor — the person who promises to repay if the borrower doesn’t. Glossary →
• Guarantee and indemnity — the combined document most lenders use. Glossary →
• Joint and several liability — each guarantor can be liable for the whole debt. Glossary →
• Contingent liability — an obligation that only arises if something else happens, such as the borrower defaulting. Glossary →

Worked example (illustrative)

Illustrative only. Two directors of a joinery business guarantee a $200,000 equipment and working capital facility. Two years later, one director leaves the business and resigns as a director. Business slows and the company falls behind on repayments.

Because the departing director never obtained a formal release from the lender, the guarantee still binds her. The lender demands payment from both guarantors. Had she asked for a release when she left — which the remaining director could have supported by refinancing the facility in the company’s name with only his guarantee — she would have been clear.

Understand what you’re signing, then find the right loan

A guarantee is a serious commitment, and the best time to understand it is before you’re asked to sign. Our enquiry takes about 60 seconds and there’s no credit check when you first enquire. We don’t circulate your details to multiple lenders — a real person reviews your situation, explains the security and guarantees involved, and calls you. Please tell us who the directors and property owners are as accurately as you can so we can match you properly first time.

See if you qualify →