Director guarantees explained

A director guarantee is the shortest document in most facility packs and the one with the longest consequences. It is worth ten minutes before you sign rather than after.

What you are actually signing

A director guarantee is a personal promise that if the borrowing entity does not meet its obligations, you will. It sits outside the company. That is the entire point of it: the corporate structure that limits your liability as a shareholder does not limit it as a guarantor.

So the practical effect is that a facility described as unsecured, in the sense that no particular asset is mortgaged, may still reach your personal position if the business fails to pay. “Unsecured” describes the company’s assets, not yours.

Why lenders ask for one

Two reasons, and only one of them is about recovery. The first is alignment — a director who is personally exposed makes different decisions about which creditor gets paid in a difficult month. The second is that for a facility of this size, taking and enforcing security over company assets is often slower and less useful than the guarantee itself.

It is not a signal that the lender expects to fail. On facilities of $5,000 – $500,000 over 3 to 6 months, it is close to standard across the non-bank market, and a lender that does not ask for one will usually have priced that in elsewhere.

When it bites

On default, not on arrears. Those are different things and the documents treat them differently. Being a few days late and being in default are separated by whatever the agreement says separates them — which is exactly why the definition of default is worth reading before the definition of anything else.

Most guarantees also allow the lender to come to the guarantor without exhausting the company first. If that matters to you, it is a clause to look for rather than an assumption to make.

Six things to check before you sign

• Is it capped? An “all monies” guarantee covers everything the entity owes the lender now and in future. A limited guarantee is capped at a stated amount. Ask which one this is.
• Does it cover future facilities? If it does, it survives this loan and attaches to the next one automatically.
• When does it end? Guarantees frequently do not fall away when the facility is repaid. Ask what releases it and get the release in writing.
• What else is being taken? A general security agreement over company assets is often signed at the same time and registered on the PPSR, where your other financiers can see it.
• Does it cover costs and enforcement? Most do. That means the exposure is larger than the loan.
• Is the definition of default what you expected? A single missed direct debit is not usually a default. Confirm rather than assume.

If there is more than one director

Guarantees from several directors are almost always joint and several. In plain terms: the lender may pursue any one guarantor for the entire amount, not for a share of it. Whether the others then contribute is a matter between you, and it is a conversation to have before signing rather than during a recovery.

If one director signs and another does not, the one who signed carries the whole thing. That is worth knowing in a business where the shareholding is even and the risk is not.

Get your own advice

This is general information, not legal advice, and a guarantee is a personal legal commitment. If any of the six points above is unclear in the document in front of you, that is the moment for your own solicitor — not the lender’s explanation of it, and not ours.

What we will do is answer the questions directly. If you are weighing a facility and want to know precisely what would be asked of you, talk to us before you apply rather than after.