Quick answer
A personal guarantee is a promise that you, personally, will repay a business loan if the business can't. Lenders usually ask company directors and trustees to sign one, because a company is a separate legal entity. Signing means your personal assets could be pursued if the business defaults, so read the guarantee carefully and get independent advice before you sign.
Key points
- A guarantee is your personal promise to repay if the business can't.
- Company directors and trustees are usually asked to sign one.
- Sole traders are already personally responsible for business debts.
- Read it closely, ask questions and get independent advice.
- Who usually signs
- Directors, trustees, sometimes others
- What it means
- You repay if the business can't
- Before signing
- Independent advice
You’ll probably meet the words “personal guarantee” the first time a lender sends you paperwork. They can sound alarming. They’re actually a very ordinary part of small business lending, but they’re also genuinely important, so this lesson takes it slowly.
What is a personal guarantee, in one sentence?
It’s your personal promise to repay the business’s loan if the business can’t.
The business is still the borrower. It makes the repayments. The guarantee only matters if the business stops paying and can’t catch up. At that point, the lender can ask you, the guarantor, to pay what’s owed.
Why do lenders ask for one?
It comes down to how business structures work.
business.gov.au explains that a company is a legal entity separate from you. That separation is a big reason people set up companies. But it creates a problem for a lender: if the company can’t pay, the lender can only chase the company’s own assets, which for a small business might not be much.
A personal guarantee closes that gap. It gives the lender someone to look to if the company fails. Without it, most lenders simply wouldn’t lend to a small company at all. So for company owners, a guarantee is often what makes the loan possible.
Sole traders are in a different spot. business.gov.au notes a sole trader is legally responsible for all aspects of the business. The debt is already effectively yours, so a separate guarantee isn’t needed in the same way.
Who usually signs?
| Business structure | Who’s usually asked |
|---|---|
| Sole trader | You’re already responsible; usually no separate guarantee |
| Partnership | Partners are typically responsible together |
| Company | Directors, and sometimes major shareholders |
| Trust | The trustee; if the trustee is a company, its directors |
Sometimes a lender also asks a spouse, parent or other person to guarantee, especially if they co-own property being used as security. That’s a big ask, and they should get their own independent advice.
What are you actually promising?
A guarantee can be broad. Read it for these details:
- How much is covered? The full loan, or a capped amount?
- What else is covered? Interest, fees and the lender’s costs of recovering the debt are often included.
- Is it “joint and several”? If there are several guarantors, this usually means the lender can ask any one of you for the full amount.
- Does it cover future loans? Some guarantees cover everything the business owes that lender, now and later. Know whether yours does.
- Is there security attached? Sometimes a guarantee is backed by a mortgage over your home. Lesson six covers borrowing against property.
If any of this is unclear, ask before you sign. A good lender or broker will explain it patiently. That’s part of what we do: start an enquiry and a real person will walk you through what you’d be signing, with no credit check to ask.
How can you reduce the risk?
You can’t make a guarantee risk-free, but you can make sure it’s a sensible one.
- Borrow an amount the business can comfortably repay. The best protection is a loan that never needs the guarantee.
- Understand the business’s numbers. If you’re guaranteeing a business you co-own, make sure you can see its finances.
- Get independent advice. A solicitor can explain the document in your particular situation.
- Keep talking to your lender. If trouble looms, early contact gives you more options.
- Ask what happens at the end. Confirm the guarantee ends once the loan is repaid.
Common myths about personal guarantees
“If I have a company, my house is completely safe.” Not if you’ve signed a guarantee. Your personal assets may be pursued if you’re called on to pay.
“A guarantee means the lender expects me to fail.” No. It’s a standard safety net for lending to small companies, not a judgement about you.
“Everyone signs these without reading them.” Please don’t be everyone. Ten minutes of reading is worth it. Signing without reading is one of the first-timer mistakes we see most often, and the easiest to avoid.
What should you ask before signing a guarantee?
Take this list to any lender or broker conversation. Each question is fair, and a good lender will answer it without hesitation.
- Exactly which loan, or loans, does this guarantee cover?
- Is there a maximum amount I could be asked to pay?
- Are other people guaranteeing too, and how does that work between us?
- Is my home or any other property being used as security as well?
- When, exactly, does the guarantee end?
- What would you do first if the business fell behind on repayments?
Write down the answers. If a word in the document puzzles you, look it up in the jargon buster first, then ask. If anything sounds different from what’s in the document itself, raise it before you sign, not after.
Want someone to explain your options calmly?
Guarantees are part of normal business borrowing, and understanding them makes you a much more confident borrower. The next step is seeing what your business could borrow and what you’d be asked to sign.
Our enquiry takes about a minute and involves no credit check. We don’t distribute your details to a queue of lenders; a real person handles your enquiry, explains what a guarantee would mean for you and answers every question in plain English. Please complete the form accurately, including your business structure, so we can explain the right paperwork first time.
Frequently asked questions
Why does a lender want a personal guarantee if I have a company?
A company is a separate legal entity from you, as business.gov.au explains. If the company can't pay, the lender would only have the company's assets to recover from. A guarantee gives the lender a second person to look to, which makes lending to a small company possible.
Do sole traders sign personal guarantees?
Usually not in the same way, because a sole trader is already legally responsible for all aspects of the business, including its debts. The loan is effectively in your personal name already.
Can someone else guarantee my business loan?
Sometimes a family member or business partner is asked to guarantee or offer security. It's a big commitment for them. They should understand the full risk and get their own independent advice.
Can I get out of a guarantee later?
Usually only when the loan is repaid, refinanced or the lender agrees to release you. Don't sign expecting it to be removed easily later.
Does a guarantee go on my credit file?
The guarantee itself generally isn't listed like a loan, but lenders check guarantors' credit, and if you're called on to pay and don't, that can affect your credit history.