Quick answer
A guarantor can help a business borrow more, borrow sooner or borrow at a lower cost, by promising to repay the loan if the business can't. Directors usually guarantee their own company's loans; a third party such as a parent or partner may be asked when the business's own income or security falls short. Guarantees can often be capped at a dollar amount, and a good deal includes a plan to release the guarantor.
Key points
- A guarantee makes someone personally responsible for the business debt if the business can't pay
- Third-party guarantees can usually be limited to a set amount or a single property, so ask before signing
- Under the 2025 Banking Code, banks generally meet a non-director guarantor without the borrower present
- Agree the exit for the guarantor at the start: a target balance, a refinance date or a release on sale
A guarantee is a promise made by one person about another person’s debt. That simple idea carries a lot of weight in small business lending, because it’s often the difference between “approved” and “come back next year”. It also carries real risk for whoever signs. This page is written for both people at the table: the owner who needs the loan, and the person being asked to back it.
When does a guarantor make sense?
A guarantor is most useful when the business is fundamentally sound but missing one piece the lender needs. Common examples:
- A young business. Trading for under a year, with a solid plan but thin history. See loans with an ABN under 12 months.
- Not enough security. The bank likes the deal but wants more property than the owner has. That’s covered in bank wants more security than you have.
- Buying in. A family member helping a son or daughter buy a business, or a parent company backing a new subsidiary.
- A cheaper deal. A guarantor with strong equity may let the business reach bank pricing in place of a costlier alternative.
It makes less sense when the business is already struggling to meet repayments. A guarantor doesn’t fix cash flow. It just spreads the damage if things go wrong.
Which kind of guarantee are you being asked for?
| Type | Who usually gives it | What it covers |
|---|---|---|
| Director guarantee | Directors of the borrowing company | Company debt, often all money owed to that lender |
| Third-party guarantee | Parent, spouse, friend, relative | The specified loan, ideally capped |
| Guarantee with a mortgage | Anyone offering their property as backing | The guarantee, secured over that person’s real estate |
| Limited guarantee | Any guarantor who negotiates it | Up to a fixed dollar amount, or only one property |
| Corporate guarantee | A related company in the same group | The borrowing company’s obligations |
When there are two or more guarantors, the guarantee is usually joint and several. That means the lender can pursue any one of them for the full amount, not just their “share”.
What should the person being asked check first?
If you’re the parent, partner or friend, these questions are reasonable and a good borrower won’t mind them:
- What’s the most I could ever be asked to pay? If the answer is “everything”, ask for a cap.
- Which property is at risk? A guarantee supported by a mortgage over your home is a much bigger commitment than an unsecured one.
- Does it cover future borrowing? All-money guarantees can reach facilities the borrower takes out later.
- How will I know if repayments are missed? Ask the lender and the borrower to agree in writing that you’ll be told early.
- When and how do I get out? A target balance, a refinance date or the sale of an asset should trigger release.
- Have I had independent advice? From a lawyer acting for you, not for the borrower.
Under the Banking Code of Practice, updated from 28 February 2025, banks generally have to meet a prospective guarantor without the borrower present before accepting the guarantee. The exceptions include where a lawyer confirms independent legal advice was given, or where the guarantor is a director, trustee or partner of the borrower. Before enforcing a mortgage over a guarantor’s home, banks must also encourage the guarantor to explain their circumstances so alternatives can be discussed. Non-bank and private lenders aren’t bound by the Code, so the questions above matter even more with them.
Banks first, then the alternatives
Banks are often the cheapest lenders for a guaranteed loan, and a strong guarantor can be exactly what gets you over their line. If your bank has said yes subject to a guarantee, take it seriously and negotiate the cap.
If the bank still says no, the guarantor’s property may support a loan elsewhere:
- Non-bank lenders accept a wider range of income evidence and business histories.
- Private lenders can lend mainly against the guarantor’s equity and a clear repayment plan, which suits short-term needs.
- A second mortgage behind the guarantor’s existing home loan can avoid refinancing their whole mortgage. See second mortgage business loans.
Weighing a guaranteed loan against the alternatives? Run the numbers past us before anyone signs.
A worked example: helping a daughter buy a café
Mai wants to buy an established café for $260k. She has $70k saved, a strong hospitality background and a lender willing to fund most of the rest. The catch: the lender wants $120k of extra security, and Mai doesn’t own property.
Her parents own their home outright. They agree to help, with conditions:
- Their guarantee is capped at $120k plus enforcement costs.
- It’s supported by a mortgage over their home, but limited to that capped amount.
- Mai pays the loan down, and once the balance falls below an agreed figure, she asks the lender to release the guarantee. If it won’t, she plans to refinance in her own name.
- Her parents get their own legal advice and are copied on loan statements.
The parents’ maximum exposure is known from day one, and there’s a documented path out. That’s what separates a sensible family guarantee from a worrying one.
Mistakes that hurt families and partnerships
- Signing on trust without reading. Even close relationships deserve written limits.
- No exit date. Guarantees without a release plan tend to outlast everyone’s memory of why they were given.
- Forgetting the guarantor’s own plans. A guarantee can stop parents from downsizing or refinancing until it’s released.
- Mixing up the lawyer. The guarantor needs their own adviser, not the borrower’s.
- Not telling the guarantor when things wobble. Early warning lets everyone fix problems before they get expensive.
If you’d rather avoid a guarantor entirely, our page on business loans with no guarantor sets out the realistic routes.
Getting the structure right before anyone signs
A guarantee is easier to get right at the start than to unpick later. If someone is offering to back your business, it’s worth seeing which lenders will accept their support, and on what terms, before you commit.
Our form takes about a minute, and enquiring leaves your credit report untouched, as well as your guarantor’s. We don’t push your enquiry out to a crowd of lenders. Someone on our team reads it and phones you to work through the options. Tell us accurately who is offering to guarantee and what property they own, so we can match the right lender straight away.
Frequently asked questions
Who can be a guarantor for a business loan?
Usually a director or shareholder of the borrowing company, a spouse or family member, or a related company in the same group. Lenders want a guarantor with real assets, often property equity, and they'll assess that person's own financial position and credit history.
What happens to a guarantor if the business defaults?
The lender can ask the guarantor to pay what the business owes, up to any limit in the guarantee. If the guarantor also gave a mortgage over their property, the lender can ultimately enforce it. That's why a cap and a clear exit plan matter.
Can a guarantor limit how much they're liable for?
Usually, yes. Banks that subscribe to the Banking Code of Practice generally allow guarantors to limit their liability to a fixed amount or to the value of a specific security. Non-bank and private lenders will often negotiate a cap as well.
Does being a guarantor affect your credit file?
The lender will usually run a credit check on the guarantor before accepting them. A guarantee also reduces what the guarantor can borrow in future, because other lenders treat it as a possible liability.
Can a guarantor withdraw?
Before the loan funds, a guarantor can generally decline or withdraw. After the loan is drawn, release usually needs the lender's agreement, typically after the balance is reduced, other security is added, or the loan is refinanced.
Do guarantors need legal advice?
Lenders often require or strongly recommend independent legal advice for third-party guarantors, separate from the borrower's lawyer. Even when not required, it's money well spent.