Personal guarantees are often signed without much thought – until things go wrong. Whether it’s a lease, loan, or supplier agreement, they can put your home, savings, and other personal assets at risk if your business can’t meet its obligations.
What Is a Personal Guarantee?
A personal guarantee is a legal promise that you’ll personally repay a business debt if the business can’t. It overrides company or trust structures and exposes your assets to creditors.
Common scenarios include:
- Commercial property leases
- Equipment or vehicle finance
- Business loans and overdrafts
- Supplier credit accounts
Why It’s Risky
Personal guarantees are legally enforceable in Australia. Even if your business goes into liquidation, creditors can pursue you personally — sometimes before taking legal action against the business itself.
Risks include:
- Loss of personal assets (e.g. house, savings)
- Unlimited liability
- Joint and several guarantees
- Reduced borrowing capacity
- Ongoing liability even after leaving the business
- Bankruptcy
How to Limit Your Exposure
Before signing:
- Negotiate terms – request a cap or expiry date on liability
- Avoid joint and several clauses where possible
- Review the full contract, not just the guarantee
- Hold assets in protective structures (e.g., family trusts)
- Get legal advice before signing
- Consider alternatives like:
- Bank guarantees
- Security deposits
- Using company assets as security
What Should You Consider Before Signing a Personal Guarantee?
Given what’s at stake, never rush into a personal guarantee – even if it’s presented as “routine” paperwork. Here are some critical points to weigh up before signing:
- Amount and scope: Is your liability unlimited, or can it be capped? What types of debts are covered?
- Duration: How long does the guarantee remain in effect? Can you be released once a particular debt or obligation is repaid?
- Security: Will the creditor require a registered security interest (such as a mortgage over your property)?
- Exit mechanism: Is there a clear, written process to remove yourself from the guarantee if you leave the business?
- Alternative arrangements: Can you offer additional security (such as a bank guarantee or increased deposit) instead of a personal guarantee?
- Legal advice: Have you reviewed the document (or draft) with a lawyer to ensure you fully understand your obligations and the risks? It’s especially worthwhile to get professional help before signing anything you’re not comfortable with.
Common Pitfalls
- Signing without understanding the terms
- Believing company structure protects you
- Ignoring related agreements where guarantees are hidden
- Failing to remove yourself after leaving the business
- Using generic templates without review
Final Word
Personal guarantees are not just a formality – they’re a powerful legal tool with serious personal consequences. Always seek advice, understand your risk, and negotiate better terms where possible.
Need help reviewing or limiting your exposure? Speak to a legal or financial advisor to protect your assets before signing anything.
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