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A guarantee is a promise by one person to pay another person’s debt if they do not. In business lending the borrower is usually a company or a trustee company, and the guarantors are its directors.
Why lenders ask
A company can be deregistered, placed into liquidation or left with no assets. Without a guarantee, a lender’s only recourse is the security property. A guarantee does two things. It gives a second source of recovery if the sale of the property falls short. And it keeps the directors engaged in fixing a problem loan, because walking away from the company does not end their exposure.
Supported and unsupported
| Type | What it means |
|---|---|
| Unsupported guarantee | A personal promise only. The lender can sue the guarantor but holds no security over the guarantor’s assets |
| Supported guarantee | The guarantee is backed by a mortgage or caveat over property the guarantor owns |
Where the security property is owned by the director personally and the borrower is the company, the director gives a supported guarantee. That is the usual structure when a family home or personal investment property secures a business loan.
What a guarantor is exposed to
- The full debt, including interest, default interest and enforcement costs, unless the guarantee is capped.
- Liability that is usually joint and several, meaning the lender can pursue any one guarantor for the whole amount.
- A claim that survives the company’s liquidation.
- A possible credit file entry if a judgment is obtained.
In practice, on a loan at 65 to 75% of value, the property normally clears the debt and the guarantee is never called on. The risk rises where values fall, the loan runs long past its term on default interest, or the security was thin to start with.
Independent advice
Lenders often require guarantors to get independent legal advice and sign a certificate confirming it, especially where the guarantor is not a director, is a spouse or receives no direct benefit from the loan. The point is to make sure the guarantor understands the document, and it protects the guarantee from being challenged later. Treat it as useful, not as a formality.
Reducing the exposure
- Borrow less against the property, so a shortfall is unlikely.
- Keep the term short and the exit realistic.
- Ask whether a cap or a several, not joint, guarantee is possible.
- Get a written release when the loan is repaid.
More on how companies are assessed is on the funding for companies page. This is general information, not legal advice.
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Get matched with a funderFAQ
Can I limit my guarantee?
Sometimes. Guarantees can be capped at an amount or limited to one director's share. It is a negotiation and is more achievable where the security is strong.
Does my spouse have to guarantee?
Only if your spouse is a director, owns the security property or is otherwise part of the transaction. A spouse who does guarantee should get independent legal advice.
Does a guarantee end if I resign as director?
No. Resigning does not release a guarantee. A written release from the lender is needed.