Small business owners are often asked to sign a personal guarantee. The request might come from a bank lending to your company. It might come from a supplier offering trade credit. Either way, your signature can put your own assets on the line.
A guarantee is quick to sign and much harder to undo. This post explains in general terms what a personal guarantee is and what to check first. It draws on guidance from the Legal Services Commission of South Australia and the Banking Code of Practice. Laws and processes differ by state and change over time.
What a personal guarantee is
A guarantee involves three parties. They are the credit provider, the debtor and the guarantor. The guarantor promises to pay the debt if the debtor refuses or is unable to. In business the debtor is often a company and the guarantor is one of its directors.
The Legal Services Commission of South Australia describes personal guarantees given by company directors in its Law Handbook. A director promises to cover the company’s debts to a supplier. If the company is wound up, the supplier can pursue the directors’ personal assets instead. In plain terms, a business debt can become a personal one.
The Commission says directors should not be surprised to be asked. Suppliers can check whether a customer is a company through the Australian Business Register or the ASIC register. If the customer is a company, the supplier may ask its directors to personally guarantee its debts. The wording of the guarantee needs care on both sides.
Why the risk is real
If you pay under a guarantee, you can try to recover the money from the debtor. That right may be worth little if the company has no money left. A guarantor who pays is also entitled to any securities the creditor holds. The Commission’s advice is plain: think very carefully before you agree to guarantee anyone’s debts, even those of family members.
A guarantee can stay in place long after you sign it. You might sign one at the start of a supplier account and forget about it. The question becomes real if the business struggles or closes. Our post on how assets are disposed of when a business closes explains more about that stage.
What to check before you sign
Read every term carefully before signing. Get independent legal advice on what the guarantee means for you. The wording matters, and small details can change how far your liability goes. If you are uncomfortable, look for other ways for the company to pay for the goods or services.
You may be able to negotiate the terms. The Commission suggests a few options to raise with the supplier or lender. These include the following.
- offering a bank guarantee instead of a personal one
- capping the amount you can be liable for
- limiting how long the guarantee lasts
- linking the guarantee to your time as a director, so resigning ends your liability
None of these options is guaranteed to be accepted. A supplier or lender may decide not to offer credit without a personal guarantee. Even so, asking costs nothing. It also tells you how flexible the other side is willing to be.
Guarantees for bank loans
Banks that subscribe to the Banking Code of Practice have extra duties to guarantors. The current version is the 2025 Banking Code of Practice, which ASIC approved on 27 June 2024. It covers individuals, small businesses and the guarantors of those customers. The Australian Banking Association sets out the Banking Code of Practice protections for guarantors on its website.
Under the Code, guarantors are told they can refuse to sign and should get independent legal and financial advice. A bank cannot accept a guarantee until the third day after the guarantor receives the required information, unless exceptions apply. Banks must also take reasonable steps to meet a prospective guarantor without the borrower present, unless the guarantor has had independent legal advice. Generally, the bank must enforce the borrower’s security before turning to the guarantor.
Before enforcing a mortgage over a guarantor’s home, the bank must encourage the guarantor to share their circumstances so other options can be discussed. Ask the bank to explain which protections apply to your guarantee. If you have a complaint, start with the bank’s internal dispute resolution service. If you are not satisfied, you may be able to take it to the Australian Financial Complaints Authority, which is free.
Leaving or selling the business
Keep a record of every personal guarantee you give. If you resign as a director, contact each creditor. Ask for written confirmation that you are released from the guarantee for debts the company incurs after you leave. Without that confirmation, you may find you are still exposed.
The same issue comes up when you sell. Guarantees belong on the list of things to sort out with your adviser before settlement. Our post on the questions to ask before selling your business covers other points to think through. Leaving a guarantee in place after a sale could leave you responsible for debts you no longer control.
Guarantees and your personal life
A personal guarantee can affect more than the business. If a relationship ends and assets are divided, guaranteed debts may need to be discussed. Knowing about every debt can help if you separate, and our post on an amicable divorce explains why a calm process is better for everyone. Telling your partner before you sign is a sensible habit.
Some law firms publish general guides online as part of their digital strategy for a law firm. Those guides can help you prepare questions. They cannot replace advice on the actual document in front of you. Take the full guarantee and any related loan or supply terms to your appointment.
Frequently asked questions
Can I refuse to sign a personal guarantee?
Yes. Under the Banking Code, guarantors are told they can refuse to sign. The lender or supplier may then decline to offer credit, so ask whether another form of security would work.
Does resigning as a director end my guarantee?
Not necessarily. Ask each creditor for written confirmation that you are released for debts incurred after you resign. A guarantee written to end with your role is worth negotiating at the start.
Should a lawyer review a guarantee before I sign?
Yes. Both the Legal Services Commission of South Australia and the Banking Code point to independent legal advice before signing. A lawyer can explain how far your liability goes and whether the terms can be limited.
Where can I complain about how my bank handled a guarantee?
Start with the bank’s internal dispute resolution service. If that does not fix it, you may be able to complain to the Australian Financial Complaints Authority. Both services are free.
This article is general information only and is not legal advice. Laws, codes and processes differ between states and change over time. Speak with a qualified lawyer before signing or relying on any guarantee.
