Quick answer
A personal guarantee is a promise by an owner or director to repay a business's debt if the business cannot. Most unsecured business loans in Australia require one. It does not register security over a specific asset like a mortgage does, but it can make the guarantor personally liable, and their personal assets can be pursued. Understand whether the guarantee is limited or unlimited, and what triggers it, before signing.
Key points
- Most unsecured business loans require a personal guarantee.
- Guarantors can be personally liable if the business does not repay.
- Limited guarantees cap the amount; unlimited ones do not.
- Read the guarantee as carefully as the loan itself.
The personal guarantee is the page of a business loan contract that many owners sign without reading closely. It deserves far more attention. It determines who is personally on the hook if the business cannot repay, and how much they could lose. This guide explains what guarantees are, why lenders need them, the different types and the questions worth asking before you put your name to one. It also covers what happens when a guarantee is called on, how guarantees interact with security, and practical ways to reduce your personal exposure.
What a personal guarantee is
A personal guarantee is a legally binding promise that, if the business does not meet its obligations under the loan, the guarantor will. It is a separate agreement from the loan itself, signed by individuals rather than the business. If the business defaults, the lender can demand payment from the guarantors, and if they do not pay, take steps to recover the debt from their personal assets.
Why lenders ask for them
A company or trust is a separate legal entity. Without a guarantee, a lender could only pursue the business’s assets if things go wrong, and many small businesses have few. A guarantee links the loan to the people who run the business, which gives the lender comfort and, in turn, makes unsecured lending possible. That is why almost all unsecured business loans to companies and trusts in Australia require one.
Sole traders are different. A sole trader and the business are the same legal person, so the owner is already personally responsible. A separate guarantee is usually unnecessary. See sole trader business loans.
Guarantee versus security
A guarantee is not the same as security. A mortgage or caveat registers the lender’s interest over a specific property, which the lender can rely on directly. A guarantee does not register anything over a specific asset at the time of signing. However, if a guarantor fails to pay under a guarantee, the lender may take legal action to recover the amount, which could ultimately involve the guarantor’s assets. Some lenders also ask for both a guarantee and security. Our guide to secured versus unsecured business loans explains the broader trade-offs.
Limited and unlimited guarantees
An unlimited guarantee makes the guarantor responsible for the full amount owing, including interest, fees and enforcement costs. A limited guarantee caps the guarantor’s liability at a set figure. Many lenders require unlimited guarantees for small business loans, but it is always worth asking whether a limit is possible, particularly when several people are guaranteeing.
Joint and several liability
When more than one person guarantees, the contract often makes them “jointly and severally” liable. In practice, the lender can pursue any one guarantor for the full amount, not just their share. Guarantors who assume they are only responsible for a portion can be surprised. Read this clause carefully.
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All-moneys clauses
Some guarantees cover not only the specific loan but “all moneys” the business owes the lender, now or in future. That can extend a guarantee to facilities you take later. Check whether the guarantee is limited to this loan or covers all debts to the lender.
When a guarantee is called on
Typically, the lender first demands payment from the business. If the business cannot pay, the lender issues a demand to guarantors. The contract sets out the process and timeframes. If you are a guarantor and the business is struggling, talk to the lender early. Options such as revised repayments are usually easier to arrange before default.
Who should not be a guarantor
Guaranteeing a business loan is a serious commitment. People who are not involved in running the business, such as relatives, sometimes feel pressured to sign. Anyone asked to guarantee should understand the business, the loan and the risks, and consider independent legal advice. A good lender will not pressure an unwilling guarantor, and a guarantee signed under pressure helps nobody.
Directors’ other personal exposures
Personal guarantees are one way directors can become personally liable. Others include director penalty notices for unpaid PAYG withholding, GST and super, and liability for trading while insolvent. ASIC publishes information for directors about insolvency. See our guide to director penalty notices.
Questions to ask before you sign
- Who is guaranteeing, and is the guarantee joint and several?
- Is it limited to a specific amount, or unlimited?
- Does it cover only this loan, or all moneys owed to the lender?
- What triggers a demand on the guarantee?
- Can a guarantor be released, for example if they leave the business?
- Is security also required, and over what?
Reducing guarantee risk
- Borrow sensibly. The best protection is a loan the business can comfortably repay.
- Keep the business healthy. Watch cash flow, tax and debt levels.
- Separate business and personal finances.
- Review guarantees when circumstances change, such as a partner leaving.
- Get advice if the business is struggling, before default.
Guarantees and unfair terms
Small businesses have protections against unfair terms in standard form contracts, including some loan and guarantee terms. If a clause seems one-sided, ask the lender to explain it, and seek advice if you are unsure. ASIC provides information about these protections.
Guarantees when a business is sold or restructured
When a business is sold, merged or restructured, existing guarantees do not automatically disappear. If you are selling, make sure the sale terms deal with any loans you have guaranteed, either by repaying them at settlement or by arranging a release from the lender. If you are buying, expect the lender to ask you for new guarantees. Raising guarantees early in a sale process avoids last-minute surprises and protects both parties.
An illustrative example
An illustrative company with two directors takes an unsecured loan for new equipment. Both directors sign unlimited, joint and several guarantees. Two years later, one director leaves the business. Because guarantees typically remain in force until the loan is repaid or the lender agrees to a release, the departing director remains liable. Before leaving, she asks the lender about a release; the lender agrees once the remaining director provides additional information about the business’s position. Raising it early made the difference.
Borrow with your eyes open
We explain the guarantee alongside every other part of an offer. There is no credit check to enquire, your details are not passed around to a crowd of lenders, and a real person answers your questions. Tell us who owns and runs the business so we can explain who would need to sign. Apply now.
Frequently asked questions
Why do lenders want a personal guarantee?
Because a company is a separate legal entity, and without a guarantee the lender could only pursue the company. A guarantee gives the lender recourse to the people behind the business.
Do sole traders sign personal guarantees?
Usually not, because a sole trader is already personally responsible for business debts. Guarantees are typical for companies and trusts.
Can a guarantee be limited?
Sometimes. A limited guarantee caps the guarantor's liability at a set amount. Many lenders require unlimited guarantees, but it is worth asking.
Can my spouse be asked to guarantee?
Lenders may ask for guarantees from directors and sometimes others with an interest in the business. Anyone asked to guarantee should understand the risks and consider independent advice.
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