TL;DR( what’s this ?)
- A director’s guarantee is a separate personal contract that lets a lender pursue you for any shortfall if your company defaults on its commercial loan.
- The wording matters: capped or uncapped, joint and several or several only, all-monies or single-loan, and indemnity or guarantee each carry very different exposure.
- Many of these terms are negotiable, but the room to move depends on the deal, the lender, and how the application is structured.
- A specialist commercial loan broker often gets directors meaningfully better guarantee terms than going direct to one bank.
Many directors read their commercial loan offer only once before signing. The rate, the term, the fees and the security usually get the attention. The personal guarantee clause sitting inside the loan documents tends to get a quick nod and a signature.
That clause is often the single most consequential part of the entire commercial loan. It can outlast the loan term, survive a sale of the business, and reach into your home equity if things go wrong.
As a finance broker in Melbourne, we strongly advise all clients to seek legal advice before signing these documents. We outline with every director what their guarantee commits them to, and where there’s room to negotiate, before any commercial loan documents are signed.
What a Director’s Guarantee Actually Is
A director’s guarantee (sometimes called a personal guarantee) is a separate contract that sits alongside the commercial loan. It’s signed by you in your personal capacity, not as a director signing on behalf of the company. If the company defaults on the loan, the lender can pursue you personally for the shortfall.
In standard Australian commercial lending, lenders require director’s guarantees because most operating companies hold limited assets of their own. Without the guarantee, the lender has nothing to pursue beyond the company itself if things go wrong. The guarantee is what gives the lender comfort to extend the loan.
The wording matters. Two guarantees from two lenders for the same loan amount can carry very different practical exposure depending on whether they’re capped, indemnified, joint, several, or unlimited.
The Different Types of Guarantee You Might Be Asked to Sign
Lenders use different wordings depending on their internal policy, the size of the loan and the security package. Here are the six most common variations you’ll come across:
Limited (capped) guarantee
Caps your personal liability at a specific dollar amount, regardless of how much the company owes. If the loan is $1.5 million and your guarantee is capped at $500,000, that’s the maximum the lender can recover from you personally. Limited guarantees are negotiable on most commercial loans, but rarely offered as the default.
Unlimited guarantee
No dollar cap. If the company owes $1.5 million plus interest, fees and recovery costs, you’re on the hook for the full amount. This is rarer to find following changes in legislation and more common on older commercial loans..
Joint and several guarantee
Where multiple directors each sign the same guarantee, joint and several means each director can be pursued individually for the entire amount, not just their share.
If you’re one of three directors and the company defaults on $900,000, the lender can pursue you personally for the full $900,000 rather than $300,000, and they’ll typically chase the director with the most recoverable assets.
All-monies guarantee
Covers not just this loan, but any future debt the company takes on with the same lender. Sign one of these and you’re guaranteeing facilities that don’t exist yet. This is common in major bank documentation and often missed in the rush to settle.
Indemnity
Stronger than a guarantee. An indemnity makes you primarily liable, not just secondarily liable. The lender doesn’t have to pursue the company first. They can come straight to you. Some lenders use the words “guarantee” and “indemnity” interchangeably in their documents, even though they create legally different obligations.
Charging clause
A clause inside the guarantee that gives the lender the right to lodge a caveat or register a security interest over your personal real estate, sometimes without first obtaining a court judgment. Easy to miss because it’s usually buried in the standard terms rather than highlighted on the front page. The practical effect can be significant: a caveat on your property title can block a refinance or sale until the lender agrees to remove it. Worth identifying before signing and pushing back on where the deal allows.
What’s Actually Negotiable
Many directors assume the guarantee is take-it-or-leave-it. It often isn’t. The starting position from a major bank is rarely the final position once a broker has had a conversation with the credit team. Here are the areas most commonly open to negotiation:
- Capping the dollar amount, especially if the loan is well-secured by commercial property and your personal assets are clearly disclosed.
- Limiting the guarantee to this specific loan rather than an all-monies clause.
- Excluding specific assets such as your principal place of residence, where the loan structure and security position support it.
- Several liability (each director liable only for their proportional share of the debt) rather than joint-and-several liability, where there are multiple directors.
- A release mechanism after a defined period of clean repayment history, particularly on construction and development facilities.
- Spousal guarantees where the spouse holds no shares and isn’t a director, which can sometimes be avoided entirely.
How much room exists depends on the strength of the deal, the lender’s policy and your existing banking relationship. A clean owner-occupier purchase at 60% loan-to-value ratio (LVR) is a very different conversation to a 75% LVR construction facility.
Knowing where each lender will move and where they won’t is most of the value a broker adds at this stage.
What Happens If the Loan Defaults
If the company defaults and the lender enforces the guarantee, here is the typical sequence on a standard guarantee:
- The lender issues a demand on the company first.
- The company fails to pay.
- The lender then issues a demand on the guarantor.
- The lender can sue the guarantor and obtain judgment against personal assets, including equity in your home, investment properties, share portfolios and bank accounts.
Where the document is structured as an indemnity rather than a pure guarantee, the lender doesn’t have to wait for the company to default first. They can pursue the guarantor directly, in parallel with any action against the company. This is one of the reasons the wording on the front page of the guarantee matters so much.
The guarantee usually survives a sale of your business. Selling your shares to an incoming director doesn’t release you from a guarantee unless the lender agrees in writing to release you. Many directors discover this years after they’ve moved on, when a default by the new owners triggers a demand against them as a former guarantor.
The Practical Steps Before You Sign
Before you commit to any director’s guarantee, working through a short due-diligence checklist can save substantial exposure later. Here are the steps we walk through with directors at Loanworx before a commercial loan is signed:
- Read the guarantee in full, separately from the loan offer. They are two different documents.
- Identify whether it’s capped, joint and several, all-monies or an indemnity. Each word matters.
- Ask the lender or your broker which terms are negotiable in your specific scenario.
- Get independent legal advice if anything is unclear. Many commercial lenders require this for non-director guarantors, and the cost is small relative to the personal exposure.
- Disclose all directors’ financial positions honestly so any restructure (e.g., several liability) is supported by the application.
- Document any negotiated changes in writing, on the lender’s letterhead, before settlement. Verbal undertakings don’t survive an enforcement scenario.
Where a Broker Adds Value
A commercial loan broker sees director’s guarantees across multiple lenders, multiple deal types and multiple credit teams. We know which lenders will cap by default, which will negotiate after a clean three-year track record, and which will hold the line on all-monies clauses regardless of the deal. That visibility is hard to replicate going direct to one bank.
Beyond negotiation, we make sure the structure of the loan supports a softer guarantee position where it can. That includes how the borrowing entity is set up, how the security is positioned, and how the application is presented to the lender’s credit team.
Small structural decisions before the loan is submitted often determine what ends up on the guarantee months later.
Negotiate the Guarantee Before You Sign
Most directors don’t realise how much of the guarantee is open to negotiation if it’s raised before settlement, and the personal guarantee is just one of several clauses in a commercial loan offer worth pushing back on. Loan covenants, default triggers, review events and break costs each carry their own implications too.
If you’ve received a commercial loan offer, sending it through to a finance broker in Melbourne for a quick review before signing is one of the most useful things you can do at this stage. Call Loanworx on 1300 562 696 to talk it through.
This article is general information only and does not constitute financial, legal or tax advice. Please obtain independent advice before acting on anything in this article.
Frequently Asked Questions (FAQs)
1. Can I refuse to sign a director’s guarantee on a commercial loan?
You can, but the lender will almost certainly decline the loan. Director’s guarantees are standard practice on commercial lending in Australia, and most lenders treat them as a non-negotiable starting point. The realistic question isn’t whether to sign one, but what terms to push for within it.
2. Does a director’s guarantee end when I sell my business?
Not automatically. Selling your shares to an incoming director doesn’t release you unless the lender agrees in writing to release you from the guarantee. Many directors find out years later that a guarantee they signed before exit is still active. A formal release should be part of any business sale process.
3. Can a lender pursue my home under a director’s guarantee?
If the guarantee is unlimited and you have equity in your home, then yes, the lender can pursue personal assets, including the family home, after obtaining a court judgment. Some directors negotiate for the principal place of residence to be excluded, where the loan structure and security position allow it. This is one of the more important areas to discuss before signing.
4. How is a director’s guarantee different from a company guarantee?
A company guarantee is given by one company on behalf of another (typically a parent company guaranteeing a subsidiary’s debt). A director’s guarantee is given by an individual in their personal capacity. The two often sit side by side in commercial lending, but they’re separate documents with separate enforcement paths. A director’s guarantee gives the lender direct recourse to your personal assets. A company guarantee gives recourse to the guaranteeing company’s assets, but not to any individual’s personal assets.
5. What is a sunset clause on a director’s guarantee?
A sunset clause sets a date or trigger after which the guarantee falls away, even if the loan is still on foot. They’re not standard, but some lenders will agree to a sunset (for example, after three or five years of clean repayment history) on owner-occupier facilities where the loan is well-secured by commercial property. Worth raising in negotiation, particularly on longer-term loans where personal exposure for the full term doesn’t match the deal’s risk profile.
6. Do I need a lawyer to review my director’s guarantee before signing?
Many commercial lenders require independent legal advice before signing a guarantee, particularly for non-director guarantors such as a spouse, and they’ll usually require a signed certificate from the lawyer confirming the advice was given. Even where the lender doesn’t require it, the cost of a legal review is small relative to the personal exposure being signed up for. We always recommend it.
