What is a personal guarantee?
A personal guarantee is a legally binding promise to repay someone else's debt if they fail to do so themselves.
Three parties are usually involved:
- The guarantor – the person making the promise.
- The debtor
– the person or business borrowing money or receiving credit.
- The creditor – the person or organisation owed the money.
If the debtor defaults, the creditor may be able to recover the debt directly from the guarantor.
When are personal guarantees used?
Personal guarantees are commonly required when:
- directors guarantee
business loans
- suppliers provide goods on credit
- landlords lease commercial premises
- businesses open trade accounts
- family members help someone obtain finance.
They're particularly common for small businesses where lenders or suppliers want additional security. It's also common for
company directors to provide personal guarantees when applying for business finance.
Why are personal guarantees risky?
Many people assume they are simply signing paperwork to help someone else.
In reality, a personal guarantee can expose your own assets to significant financial risk.
Depending on the wording of the guarantee, you could become personally liable for:
- business loans
- unpaid supplier invoices
- interest
- legal costs
- future debts under an ongoing arrangement.
Some guarantees continue indefinitely until they are formally released.
What is a continuing guarantee?
Many guarantees are not limited to a single transaction.
A continuing guarantee can apply to every future purchase or supply made under the same agreement.
This means you could remain personally responsible for debts that arise months or even years after signing.
Before signing any guarantee, make sure you understand:
- how long it lasts
- whether there's a financial limit
- how it can be terminated.
Can a personal guarantee be challenged?
Sometimes this is possible - but only in limited circumstances.
A guarantee may not always be enforceable if:
- it was not properly signed
- legal requirements were not followed
- the underlying agreement changed without your consent
- the creditor materially altered the debtor's obligations
- exceptional circumstances make enforcement unfair.
Every situation is different, so obtaining legal advice is essential.
Before signing a personal guarantee
Ask yourself:
- Do I understand exactly what I'm guaranteeing?
- Is there a financial limit?
- How long does the guarantee last?
- Could I afford to repay this debt myself?
- Have I obtained independent legal advice?
A personal guarantee should never be signed simply because someone asks you to.
What if a guarantee is already being enforced?
If you have received a demand under a personal guarantee, you may have options.
A lawyer can review:
- whether the guarantee is enforceable
- whether it covers the debt being claimed
- whether any legal defences may be available
- whether the creditor followed the correct process.
Seeking advice early often provides more options.
Key takeaway
A personal guarantee is a legally binding commitment that can affect your finances long after you have signed.
Understanding exactly what you're agreeing to - and obtaining independent legal advice beforehand - can help you avoid unexpected liability in the future.
If you are considering signing a personal guarantee, or one is being enforced against you, Our
Commercial Law and
Dispute Resolution teams regularly advise directors, business owners and guarantors on personal guarantees, lending arrangements and commercial disputes.
