Will I have to sign a personal guarantee?

Mr’s first rule of guarantees: never sign one you haven’t read. His second: don’t be shocked when you’re asked. A personal guarantee is part of nearly every business loan in New Zealand, and understanding it properly is one of the most useful things a director can do.

What is a personal guarantee?

It’s a promise you make, as an individual, to repay the business’s debt if the business doesn’t. The loan is to the company (or to you as a sole trader, in which case you’re already personally liable). The guarantee is the extra promise that lets the lender come to you personally if the business can’t pay.

Doesn’t my limited company protect me?

Only up to a point. As business.govt.nz explains, company shareholders are responsible for the company’s debts up to the value of their shares. That protection is the whole reason many people incorporate. A personal guarantee is a separate contract you sign that sets that protection aside for this lender and this debt.

So a director who has signed a guarantee can be personally liable even though the business is a limited company. That’s normal — and it’s why the decision deserves a proper look. For more on structures, see do I need a registered company to get a business loan?

Why do lenders insist on them?

From a lender’s side, a guarantee:

• ties the people running the business to the outcome;
• gives a second source of repayment if the business fails;
• discourages a director from walking away from the company and its debts.

Unsecured lenders rely on guarantees heavily because there’s no property behind the loan. Property-secured lenders usually ask too, alongside the mortgage.

What types of guarantee are there?

Type	What it means
Limited guarantee	Capped at a stated amount
Specific guarantee	Covers one named loan or facility only
All-obligations guarantee	Covers everything the business owes that lender, now and in future
Joint and several	Each guarantor can be pursued for the whole amount, not just a share

The last two are where people get caught out. An all-obligations guarantee signed for a small loan years ago can quietly cover a much bigger facility later. Joint and several liability means if your co-director can’t pay, the lender can look to you for all of it.

What should I ask before signing?

Take this list to your lawyer:

1. Is the guarantee limited to an amount or to this loan only?
2. Does it cover future borrowing or other facilities?
3. Is it joint and several with other guarantors?
4. Is it supported by a mortgage over my home or other property?
5. What has to happen before the lender can call on it?
6. How and when can I be released?

Independent legal advice isn’t a formality here. Some lenders require a solicitor’s certificate confirming you’ve been advised, especially if your partner or a family trust is involved — see using property owned by a family trust.

If you’d like to understand what a lender is likely to ask of you before you go further, ask us here — it doesn’t involve a credit check.

How do I lower the risk of a guarantee being called?

• Borrow an amount the business can comfortably repay.
• Build a buffer for slow months, tax dates and late-paying customers.
• Keep tax up to date or under an instalment arrangement.
• Talk to the lender early if trouble’s coming — options shrink the longer you wait.
• Keep your guarantees list current: know exactly what you’ve signed and for whom.

What if I’m leaving the business?

If you’re selling your shares or stepping back as a director, a guarantee doesn’t end just because you leave. Make the release of your guarantee a condition of the sale, or make sure the loan is refinanced in the remaining owners’ names.

An illustrative example: two directors, one guarantee

This scenario is made up, but the pattern is common.

Two friends own a Christchurch IT services company 50/50. The company borrows $150,000 unsecured to hire two technicians for a new contract. The lender asks both directors to sign a joint and several personal guarantee. Two years later, one director moves to Australia and steps away from the business. The company hits a rough patch and falls behind on repayments.

Because the guarantee was joint and several, the lender can pursue either director for the whole outstanding amount — not just half. The director who stayed and the one who left are equally exposed, and the one who left assumed his guarantee ended when he resigned. It didn’t.

What would have helped:

• negotiating a cap or a specific-loan-only guarantee at the start;
• making a guarantee release part of the exit when one director left;
• refinancing the loan into the remaining director’s name at that point;
• each director getting their own independent legal advice before signing.

Guarantees and couples

A common New Zealand situation: one partner runs the business, the other doesn’t, and the family home is jointly owned. If the home secures the loan, both owners must sign the mortgage documents. Some lenders also ask the non-business partner for a guarantee.

That partner should:

1. get their own independent legal advice, not share the business owner’s lawyer;
2. understand exactly what’s being guaranteed and for how long;
3. know they can ask questions, and that signing is their decision.

Lenders often insist on this advice for good reason. It protects the partner, and it makes the documents more robust for everyone.

Ask before you sign

Personal guarantees are routine, but they deserve care. Tell us about your business structure and what you’re hoping to borrow, and a real person will explain what’s likely to be asked of you and why. There’s no credit check to ask, your details don’t get forwarded to a pile of lenders, and you’ll talk to someone who answers questions straight.

Please fill in the form carefully, including who owns the business and any property involved — it helps us match you properly from the start. See if your business qualifies.