Quick summary
This guide sets out practical steps to help you identify, compare and qualify for business finance in Australia. It is general information, not financial advice.
1. What a Personal Guarantee Is
When a company borrows, the company is the borrower. A personal guarantee is a promise by a director, or another person, that they will repay the debt if the business cannot. It means the lender can pursue the guarantor personally. Many lenders ask for a guarantee on small business lending, including unsecured business loans, because the business itself may have limited assets.
2. Unsecured Loan Does Not Mean No Personal Risk
An unsecured business loan means the lender does not take a specific asset, such as property, as security. If you sign a personal guarantee, you can still be personally liable for the debt. Some guarantees are also supported by security over personal assets. Read the documents to see exactly what you are agreeing to, rather than relying on the product name.
3. Questions to Ask Before You Sign
Is the guarantee limited to a set amount or unlimited? Does it cover only this loan, or all present and future debts the business owes the lender? Is it secured over any personal asset, such as your home? Who else is guaranteeing, and can the lender pursue any one guarantor for the full amount? Can the guarantee be released, and on what conditions? The answers are in the guarantee document, and a lender or broker should help you find them.
4. Get Independent Legal Advice
A guarantee is a legal commitment that can outlast your involvement in the business. Have a solicitor review it before you sign. Some lenders require independent legal advice for guarantors, particularly those who are not directors. The cost of advice is small relative to the commitment.
5. Guarantees Are Separate From Director Penalties
Directors can also become personally liable to the ATO for certain unpaid company amounts, such as PAYG withholding, GST and superannuation guarantee charge, under the director penalty regime. That is separate from any loan guarantee. Keeping lodgements up to date and dealing with tax debts early protects you on both fronts. Talk to your accountant if you are unsure where you stand.
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