Quick answer
A guarantee is a binding promise by one party to meet another party's obligation if that party fails to. In business lending it usually means someone other than the borrower, such as a director, a related company or a family member, agrees to repay the loan if the business defaults. A bank guarantee works the other way: a bank promises to pay a third party, such as a landlord, on the business's behalf.
Key points
- A guarantee adds a second source of repayment behind the borrower
- Director, third-party, corporate, bank and government guarantees all work differently
- Banks under the Banking Code must cap guarantees and give guarantors time to consider
- Several guarantors usually sign jointly and severally, so each can be pursued for the full amount
At its simplest, a guarantee is a backstop. One party owes something, and a second party promises to step in if the first doesn’t pay or perform. Lenders like guarantees because they turn a single source of repayment into two, and they’re one of the most common documents a business owner signs when borrowing.
The word gets used for several quite different arrangements, though, so it’s worth knowing which one is in front of you.
Five kinds of guarantee in business finance
| Kind | Signed by | Benefits | Where you’ll see it |
|---|---|---|---|
| Director guarantee | The borrowing company’s directors | The lender | Nearly all small company borrowing |
| Third-party personal guarantee | A spouse, parent or investor outside the business | The lender | Where the directors lack enough assets |
| Corporate or cross-guarantee | A related company or corporate trustee | The lender | Groups with property or assets in a separate entity |
| Bank guarantee | A bank, on your behalf | A landlord, supplier or client | Lease bonds, contract performance |
| Government guarantee | The Commonwealth, through a scheme | The participating lender | Past programs such as the COVID-19 SME schemes |
The first three all add a backstop for the lender. The bank guarantee flips the direction: the bank is backing your business to someone else, and you indemnify the bank.
Protections when the lender is a bank
Where a bank has adopted the industry’s 2025 Banking Code of Practice, the Code gives people guaranteeing a small business loan some useful safeguards. The Code’s small business test has three limits, all of which must be met: turnover below $10 million in the prior financial year, a headcount under 100 full-time equivalents, and borrowings across all credit providers below $5 million. Where that test is met, the Code says:
- the guarantor’s exposure must be capped, either at a dollar figure or at the value of specified security
- the bank doesn’t accept the guarantee until the third day after giving the guarantor the key documents, unless they’ve had independent legal advice
- the guarantor can withdraw before credit is first provided
- in most cases, the bank enforces the borrower’s own security before turning to a guarantor’s home
Non-bank and private lenders aren’t bound by the Code, so read their guarantee terms with extra care.
Worried the guarantee you’re being asked for is too broad? Talk to us about your options before you sign.
An example of how it plays out
Two directors run a fit-out company that borrows $240k for equipment and working capital. The funder wants guarantees from each director, plus a corporate guarantee from the trustee company of their family trust, which holds a warehouse.
Two years later a major client collapses and the business can’t keep up repayments. The lender sells the financed equipment and recovers $150k, leaving $90k owing. Because the directors signed jointly and severally, the whole $90k can be demanded from either director, or from the trustee company, with no neat split between them. Whoever pays can then seek a contribution from the others.
That’s why many owners ask early for a dollar cap or a guarantee limited to one facility.
Related terms
Guarantor, indemnity and security, general security agreement and contingent liability. If you’d rather not offer a guarantee at all, see business loans with no guarantor.
Want finance that fits the guarantees you can give?
Some lenders want guarantees from everyone in sight; others are content with less where the security or trading is strong. We can help you find the right match for your structure. Our form needs about a minute, and submitting it leaves no enquiry on your credit history. Your information isn’t auctioned off to a queue of funders; someone here studies your circumstances and gives you a call. Tell us honestly who is willing and able to guarantee, which lets us recommend a lender that really suits on the first attempt.
Frequently asked questions
What's the difference between a guarantee and a guarantor?
The guarantee is the promise, set out in a written document. The guarantor is the person or company who makes it. A single loan can have several guarantors, each signing the same guarantee or separate ones.
Is a bank guarantee the same as a loan guarantee?
No. A loan guarantee protects a lender if a borrower defaults. A bank guarantee is a bank's undertaking to pay a third party, often a landlord or supplier, if your business doesn't meet its obligations to them. The bank usually holds cash or security from you to back it.
Can a company give a guarantee?
Yes. Related companies in a group often guarantee each other's debts, sometimes called a cross-guarantee. A trustee company may also guarantee a loan to an operating company, which can bring trust assets into the lender's reach.
Does the government guarantee small business loans?
Not as an ongoing general program. During COVID-19 the Australian Government ran the SME Guarantee Scheme and the SME Recovery Loan Scheme, which guaranteed part of eligible loans written by participating lenders. Those schemes have closed to new loans.
Can I negotiate the terms of a guarantee?
Often. Owners can ask for a dollar cap, for the guarantee to cover only one facility, or for a release once the loan is reduced. Lenders won't always agree, but it costs nothing to ask before signing.