Quick answer
A guarantor is a person or company that promises a lender they'll repay a loan if the borrower doesn't. In Australian business lending the guarantor is usually a company director, but it can be a partner, spouse, parent or related company. If the business defaults, the lender can pursue the guarantor for the amount owing, and where the guarantee is backed by property, enforce against that property.
Key points
- Directors of a borrowing company are almost always asked to be guarantors
- Third-party guarantors, such as parents, take on the risk without owning the business
- Liability can be unlimited or capped; the guarantee document says which
- Banks that follow the Banking Code of Practice give guarantors extra protections
When a lender asks “who’s going to guarantee this?”, it wants a second source of repayment standing behind the business. The guarantor is that person or company: someone who agrees in writing to pay the debt if the borrower can’t.
Who usually becomes a guarantor?
Directors. Because a company stands legally apart from its owners, without a guarantee the lender could only chase the company’s assets. Almost every lender, bank or non-bank, asks the directors to sign a director guarantee. For many owners it’s simply part of borrowing through a company.
Third parties. Sometimes the business or its owners don’t have enough security or history, and someone else steps in: a parent with a paid-off home, a spouse, a business partner who isn’t a director, or a related company in the same group. These guarantors take on real risk without controlling how the business is run.
Trusts and companies. In group structures, a trading company might guarantee a loan to the property-owning trust, or the reverse. Lenders call this cross-guarantee arrangement a way of tying the group’s assets together.
What the guarantor is agreeing to
The guarantee document sets out the answers, and they vary widely:
| Question | What to look for |
|---|---|
| How much? | Unlimited, or capped at a fixed dollar figure |
| Which debts? | This loan only, or “all monies” owed now and in future |
| Backed by what? | Personal promise only, or supported by a mortgage over property |
| Shared with whom? | Joint and several with other guarantors: the lender may chase any one of them for the whole debt |
“All monies” wording is the one to watch. It can extend the guarantee to future loans or overdrafts the borrower takes with the same lender.
A worked example
Two directors of a Perth fit-out company each guarantee a $400k loan from a non-bank lender. Eighteen months later, one director sells their shares and resigns. The loan still has $280k owing. Unless the lender formally releases the departing director, they remain liable for the full $280k, alongside the remaining director, since joint and several liability attaches to each signatory. The tidy exit was to make the release a condition of the share sale, or have the loan refinanced in the remaining owner’s name.
Thinking about bringing in a guarantor to get a deal over the line? Run it past us first so you know what’s actually needed.
Protections worth knowing about
Banks signed up to the Australian Banking Association’s code must give prospective guarantors key information about the loan and, in most cases, can’t accept the guarantee until the third day after providing it, unless the guarantor has had independent legal advice or falls into an exempt group such as a director guarantor who chooses to sign earlier. Guarantors can also withdraw in writing before credit is first provided. Non-bank and private lenders aren’t bound by that code, so ask what their process is.
Moneysmart’s guidance for anyone guaranteeing a business loan is practical: ask to see the business plan, cash flow forecasts and recent financial statements, and get independent legal and accounting advice before signing. That’s sensible whatever the lender.
Related terms
Guarantee, personal guarantee, contingent liability, security and default all shape what a guarantor is exposed to.
Need finance and wondering who has to sign?
The answer depends on your structure, your security and the lender, and it’s better to know before anyone is asked to put their name down. Tell us about the business and we’ll explain what the likely options require. The form takes about a minute, and enquiring leaves your credit score alone. No crowd of lenders gets your details: one person here reads them and calls you. Listing the directors, shareholders and any property correctly lets us line up a suitable match on the first go.
Frequently asked questions
Is a guarantor the same as a co-borrower?
No. A co-borrower is jointly responsible for the loan from day one and usually benefits from it. A guarantor only becomes liable if the borrower fails to pay, though once that happens the lender can usually pursue them directly without suing the borrower first.
Can a guarantor limit how much they owe?
Sometimes. A limited guarantee caps liability at a set dollar figure, or limits it to a specific property. Ask before signing. Lenders don't always agree, but it's a reasonable request, especially for third-party guarantors.
Can I stop being a guarantor?
Usually only with the lender's agreement, typically when the loan is repaid or refinanced or another guarantor or security replaces you. Resigning as a director doesn't, by itself, release you from a guarantee you've already signed.
Does being a guarantor affect my own borrowing?
It can. Other lenders may count the guaranteed debt as a contingent liability when assessing your own loan, and if the borrower defaults and you can't pay, a default can appear on your credit file.
Can I get a business loan without a guarantor?
For some products, yes, such as certain asset finance or property-secured loans to a borrower who owns the security personally. Most company loans still need the directors to guarantee.