Director guarantee

Setting up a Pty Ltd company is meant to put a wall between the business’s debts and your personal life. For most borrowing, a director guarantee is where the lender asks you to step back over that wall.

What you’re actually signing

The company is the borrower. The guarantee is a separate document, signed by you personally, saying that if the company doesn’t pay, you will. It doesn’t make you a borrower, and nothing happens to you while the company keeps up repayments. It only matters on the day things go wrong.

Read three things closely before signing:

• What it covers. An “all moneys” guarantee covers everything the company owes that lender, now and in future, including overdrafts, cards and equipment finance taken out years later. A specific guarantee covers only the loan named.
• Whether it’s limited. Some guarantees are capped at a dollar figure. Most small business guarantees are not.
• What backs it. A guarantee on its own is a promise. Often it’s paired with a mortgage over your home, which turns a promise into security the lender can enforce directly.

Why lenders nearly always ask

From a lender’s side, a small private company may have few assets beyond some equipment and debtors. If it fails, a general security agreement over those assets may not recover much. A guarantee gives the lender a claim on the people who control the business, and it signals that those people have something to lose. Banks, non-banks and online lenders all ask, so it isn’t a sign of being treated harshly.

Talking through a loan where you’d rather limit your personal exposure? Send through a quick enquiry and we’ll tell you what’s realistic.

An example of how liability lands

Two directors, Priya and Tom, own a joinery business that borrows $200k from a non-bank lender. Both sign joint and several director guarantees. Two years later, a major builder goes under owing the company money, and the company enters liquidation with $140k still owing on the loan.

The lender can ask Priya alone for the full $140k. Tom moved interstate and owns nothing; Priya owns a home. The lender is entitled to pursue whichever guarantor can pay. Priya’s right to claim half back from Tom is real but may be worth little in practice.

Had Tom resigned a year earlier without getting a written release, he’d still be on the hook too. That catches out many people who leave a business on good terms.

Ways to reduce your exposure

• Ask for a limited guarantee capped at the loan amount rather than all moneys.
• Ask that the guarantee fall away once the loan is repaid or the balance drops below a set level.
• Offer company-owned security instead, such as equipment, commercial property or a term deposit.
• When a director leaves, make their release part of the exit paperwork with the lender.

Lenders won’t always agree, but these are normal requests and asking costs nothing. Our page comparing guarantor and no-guarantor business loans sets out when going without one is feasible.

Related terms

A personal guarantee is the broader category. Don’t confuse a director guarantee with personal liability under a director penalty notice, which comes from tax law and needs no signature at all.

Weighing up a company loan?

Most company borrowing comes with a guarantee, and going in with clear eyes is half the work. Let us know what the company needs, what security it has and what you’d prefer to keep out of it. You’ll be done with the form in about a minute, and enquiring leaves your credit file alone. We won’t fire it out to dozens of lenders. Someone on our team reads it properly and calls to talk options. Fill it in accurately, including any existing guarantees, so the first lender we suggest is one that works for you.

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