What is a personal guarantee?
When a company borrows or takes credit, the lender or supplier is dealing with a separate legal person. The company’s debts are its own. A personal guarantee changes that. By signing one, a director, shareholder or sometimes a family member agrees to pay the company’s debt personally if the company doesn’t.
For small businesses in New Zealand, guarantees are everywhere:
- bank overdrafts and business loans;
- commercial leases;
- trade accounts with suppliers;
- equipment and vehicle finance;
- fuel cards and business credit cards;
- unsecured business loans and lines of credit.
Many directors sign them at account opening without much thought, years before they matter.
When a guarantee can be called on
Usually when the company defaults, meaning it doesn’t pay when it should. The creditor can then demand payment from the guarantor. Depending on the wording, the creditor may not have to exhaust its remedies against the company first.
Common trigger points:
- the company misses payments and doesn’t respond;
- the company is placed in liquidation, receivership or administration;
- a lease is terminated with rent owing;
- a supplier account is closed with a balance outstanding.
Guarantees and liquidation
Directors are sometimes surprised to learn that liquidation doesn’t end their personal guarantees. It often triggers them. The company’s debts may never be paid in full by the liquidator, and creditors holding guarantees can pursue the guarantors personally for the shortfall.
That’s one reason formal insolvency can be more costly for directors than it first appears, and why paying creditors in full, through refinancing where possible, can protect directors as well as the business.
What to look for in the wording
| Clause | What it means |
|---|---|
| “All obligations” or “all moneys” | Covers every debt the company owes that creditor, now and in future, not just one loan |
| Limited amount | Liability capped at a set figure; less common |
| Joint and several | Each guarantor can be pursued for the whole amount, not just their share |
| Indemnity | Makes you liable even if the underlying debt is unenforceable against the company |
| Security | The guarantee is secured, often by a mortgage over your home |
| Continuing guarantee | Survives changes to the facility and continues until formally released |
Guarantees are legal documents with real consequences. If you’re asked to sign one, or you’re facing a demand under one, get legal advice.
If you’re facing a demand under a guarantee
- Get a copy of the guarantee you signed, and read it with a lawyer.
- Ask the creditor for a full statement of what they claim and how it’s calculated.
- Check whether the company can still pay. If the company is still trading, dealing with the debt at company level may be simplest.
- Talk to the creditor. A payment plan, reduced settlement or release in exchange for payment may be negotiable.
- Consider funding. A property-secured loan can pay the guaranteed debt in full, ending the demand.
Personal guarantees when borrowing to rescue the business
Business lending of the kind we arrange commonly involves personal guarantees from directors or owners, particularly for unsecured loans and lines of credit, where the lender has no property security. For property-secured loans, the security is the property itself, which may be yours or a supporting party’s.
Either way, you should go in with eyes open. A guarantee to a lender that has cleared your IRD arrears and your pressing creditors can still be a much better position than several guarantees to creditors who are all chasing at once, but it’s still a personal commitment.
Supporting parties
Sometimes a parent, sibling or partner offers to guarantee a loan or provide their property as security. It’s generous and often decisive. It’s also a serious risk for them. They should:
- understand the business and the loan;
- know the maximum they could lose;
- take independent legal advice, separate from yours.
Where funding fits
If personal guarantees are a big part of what’s worrying you, it’s worth checking whether a refinance could pay the guaranteed debts in full. That can remove the most dangerous exposures, including an unpaid lease or a large supplier account, before they’re called on. Property-secured loans range from $20,000 to $1m. Start an enquiry and a lending specialist will talk it through.