Why Personal Guarantees Should Not Be Signed Lightly
By Wendy Edwards
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A personal guarantee can look like a routine document. It may be presented as part of a loan, lease, business purchase, franchise arrangement, supplier account or company finance package. In practice, however, signing a guarantee can expose a person to serious personal financial risk.
A guarantee usually means that one person agrees to be responsible for another person’s or company’s obligations if that borrower or business does not pay. This can be particularly risky for company directors, spouses, parents, business partners and family members who sign documents to support someone else’s transaction.
Before signing, a person should understand exactly what they are promising. For people in Melbourne’s eastern suburbs, obtaining guarantor advice before signing loan documents can help identify the risks and explain the practical consequences.
A guarantee can affect personal assets
Many people sign guarantees because they trust the borrower or believe the risk is remote. The problem is that a guarantee may become enforceable when the borrower defaults, the business fails, the loan is called up, or the lender decides to recover the debt from the guarantor.
Depending on the terms, the guarantor may become responsible for the principal debt, interest, legal costs, enforcement expenses and other charges. If the amount is large, personal savings, real estate or other assets may be exposed.
Some guarantees are limited to a fixed amount. Others are broader and may cover future advances, variations, renewals or related obligations. A person should never assume the guarantee is narrow unless the document clearly says so.
Company directors should be especially cautious
Directors of small companies are often asked to sign personal guarantees for business loans, commercial leases, trade accounts or equipment finance. This can blur the line between company risk and personal risk. A company structure may provide some protection in ordinary circumstances, but a personal guarantee can give a creditor a direct claim against the individual.
This is why directors should consider guarantees as part of the broader commercial transaction. The same applies when buying or selling a business, entering a lease, joining a franchise system or taking on finance. Early business and commercial legal advice can help identify where personal liability may arise and whether the proposed terms are acceptable.
Independent advice is not just a formality
Banks, lenders and other parties sometimes require a guarantor to obtain independent legal advice before documents are signed. That requirement should not be treated as a box-ticking exercise. Proper advice should explain the nature of the guarantee, the documents being signed, the potential liability, and what may happen if the borrower defaults.
The guarantor should also ask practical questions. What is the maximum exposure? Is the guarantee limited or unlimited? Can it be released later? Does it secure existing debts as well as new debts? Are there mortgages, charges or other securities involved? What happens if the loan is refinanced or the business changes hands?
Do not sign under pressure
A person should be cautious if they are asked to sign urgently, discouraged from obtaining advice, or told that the document is “standard” and does not need proper review. Standard documents can still create serious obligations.
A personal guarantee may be appropriate in some circumstances, but it should be signed only with a clear understanding of the risk. Once signed, it can be difficult to unwind. Taking advice before signing is far easier than trying to defend enforcement action later.