Quick answer
A director guarantee is a personal promise to repay a company's debt if the company cannot. Funders ask for one when there's little or no asset security, and it can unlock funding that would otherwise be unavailable. Its cost is personal liability, so read the documents carefully and take independent advice before signing.
Key points
- A guarantee makes you personally liable if the company can't pay.
- Funders use it where security is thin; it can be paired with property or stand alone.
- Limited or unlimited, joint or several, secured or unsecured: the wording changes the risk.
- Independent advice before signing is sensible, and ASIC says not to sign if you feel pressured.
- What it is
- A personal promise to repay if the company cannot
- Used when
- Funding is unsecured or lightly secured
- Funder looks at
- Directors' own position, experience and credit file
- Hand over
- ID, a summary of personal assets and liabilities if asked
Sometimes the main thing a business has to offer a funder is the person running it. A company is a separate legal entity; it can borrow, and if it can’t pay, the lender stops at the company’s door. A director guarantee moves the door. By signing it, you agree that if the company defaults, the funder can come to you.
That is a serious thing to offer. It’s also the reason many small companies can access unsecured funding at all.
What do funders look at when your guarantee is the starting point?
The funder is assessing you as well as the company.
- Your experience. How long you’ve run this business or others in the industry.
- Your personal credit file. Directors’ credit history is commonly part of the assessment, once you decide to go ahead. We never run a check just because you’ve enquired.
- Your wider position. Some funders ask for a summary of personal assets and liabilities, mainly to understand what the guarantee is actually worth.
- How the business is structured. Whether the company is the borrower, who the directors are and who owns the shares.
- Whether other security exists. A guarantee alone, a guarantee plus equipment, or a guarantee plus property each look different.
How does a guarantee turn into funding?
A guarantee isn’t funding by itself; it makes an unsecured facility acceptable to a funder. The practical effect is that a company with a decent trading history, but no property or equipment to pledge, can borrow on the strength of its cash flow plus the directors’ backing.
| Wording | What it means | Risk to you |
|---|---|---|
| Unsecured guarantee | A personal promise with no asset attached | You can be pursued personally, but no specific asset is pledged |
| Secured guarantee | Your promise is backed by an asset, often property | Both your personal liability and a specific asset are exposed |
| Limited guarantee | Capped at an amount or time | Lower exposure, though not always available |
| Joint and several | Each guarantor is liable for the whole debt | A funder can pursue any one of you for everything |
What do you need to hand over?
- Photo ID for each guarantor.
- A short summary of your role in the business and your experience.
- If asked, a statement of personal assets and liabilities.
- The facility documents, which you should read in full, with the guarantee wording highlighted.
- Confirmation that you have taken independent advice, if the funder requires it.
If you want to see how a guarantee might fit before any documents appear, tell us about the business and the directors and we’ll say what the funder is likely to ask for.
What are the trade-offs?
Personal liability. ASIC’s guidance for directors states that lenders and suppliers may require a personal guarantee or security such as the family home, and that if the company cannot repay, the director may have to pay personally. It also advises against signing if you feel pressured or unsure, and recommends independent advice first.
It follows you after the business. A guarantee can outlive your involvement unless it’s released in writing, so ask what happens if you sell or leave.
It affects the people around you. A partner or family member may be affected if assets are shared.
Terms can be hard. ASIC notes that unfair contract term protections can apply to standard form small business contracts. If a clause seems one-sided, ask about it.
How can you reduce the risk of giving a guarantee?
There are practical ways to make a guarantee safer, though none removes the risk entirely. Ask whether it can be limited to a set amount or a set period. Ask whether it reduces as the loan is repaid. Find out what happens if you leave the business or sell your shares, and whether you can be released. Check whether the guarantee is secured over your home or is a personal promise only.
It also helps to keep your own finances separate and clear. A funder who sees an organised picture is more comfortable, and you are better placed to judge what you could actually afford to lose if the worst happened.
What should a second director or a partner understand?
A guarantee by two directors is often joint and several, meaning each can be pursued for the whole amount. That surprises people who assumed liability would be split evenly. A partner who is not a director may also be affected if assets are shared or if the family home is involved. Everyone affected should read the same documents, ask their own questions and, where the funder or ASIC’s guidance suggests, take independent advice before anything is signed.
When is a director guarantee the wrong tool?
If you can fund the business with an asset the company owns, using the asset keeps the company’s debts inside the company; see equipment or unpaid invoices. If the repayment plan relies on hope rather than evidence, don’t guarantee it. And if you’re a sole trader, there’s no separate company to guarantee for: you’re already personally liable, which is covered in funding for sole traders.
Are you ready to back your business?
Maybe, and the first step costs you nothing. Enquiring doesn’t involve a credit check, your details are not sent to a long list of lenders, and a real person explains what any funder is likely to want before you commit to anything. Answer the questions as accurately as you can, particularly about directors and existing debts, so we can match you properly from the start. See if you qualify.
Frequently asked questions
Can a funder ask for a guarantee even if the company has assets?
Yes. Funders often ask for guarantees as an additional layer, particularly with newer companies or where the assets are modest relative to the loan.
Can I limit my guarantee?
Sometimes. Guarantees can be limited to a set amount or period. Whether a funder agrees depends on the deal, and it is worth asking before you sign.
What if there are two directors?
Both may be asked to guarantee, often jointly and individually. That means a funder could pursue either of you for the full amount, so understand the wording.
Does a guarantee put my home at risk?
An unsecured guarantee is a personal promise; a secured guarantee ties the promise to an asset such as property. The documents will say which applies.
Do I need legal advice?
ASIC recommends independent advice before signing a guarantee, and says not to sign if you feel pressured or unsure.