Signing a personal guarantee can feel like a formality, one more page in a stack of paperwork before you get the keys, the credit account, or the finance approved. But it quietly moves the risk from your business to you personally, and most business owners don’t realise the full extent of it until something goes wrong.
In this article, Prosper Law’s experienced contract lawyers discuss what’s actually at stake, and how to protect yourself before you sign.
Why business owners sign these without a second thought
Personal guarantees show up all over the place in business contracting: commercial leases, supplier credit accounts, equipment finance, business loans, even some franchise agreements. Whatever the contract, the pattern is the same. It lands on your desk near the end of a long negotiation, the commercial terms look fine, and buried a few pages in is a clause asking you, personally, to guarantee the company’s obligations.
Most business owners sign it without a second thought. The company is the one entering the contract, so surely the company is the one on the hook if things go wrong. That assumption is where the trouble starts.
A personal guarantee steps outside the protection a company structure is meant to give you. If your business can’t pay rent, can’t repay a loan, or can’t pay a supplier invoice, the other party doesn’t have to chase the company first. They can come straight after you: your house, your savings, your other assets, regardless of whether the business folds.
This keeps showing up because guarantee clauses are standard practice for landlords, lenders and suppliers dealing with small or newer companies. From their side, it’s a reasonable way to reduce risk when a business doesn’t have a long trading history. From the business owner’s side, it’s often signed under time pressure, without really registering what “joint and several liability” or “indemnity” actually means in practice.
We’ve seen this play out in a few different settings.
A first-time café owner signed a five-year retail lease to get the keys before opening day. The guarantee clause was on page 14. She didn’t think much of it at the time, and it never came up again until the business hit a slow winter eighteen months later.
A wholesaler client of ours signed a standard credit application with a new supplier to get better payment terms, not realising a personal guarantee was baked into the fine print.
And we’ve seen it in equipment finance too, where a tradie personally guaranteed a leasing agreement for a new vehicle fleet, assuming (wrongly) that the vehicles themselves would be the only security the financier could call on.
What it actually costs when things go wrong
If the business hits a rough patch, such as a bad quarter, a lost client, or a failed product launch, a personal guarantee turns a business problem into a personal one.
Landlords can pursue guarantors for the remaining term of a lease, not just the rent already owed. Lenders and equipment financiers can pursue the full outstanding balance of a loan or lease, even after the underlying asset has been repossessed and sold. Suppliers can do the same for unpaid invoices, sometimes with interest and debt recovery costs added on top. In each case, the amount owed can run to tens or hundreds of thousands of dollars, even after the business itself has closed its doors and stopped trading.
The financial exposure is one thing. The other cost is what it does to your decision-making. Individuals who’ve signed personal guarantees often become reluctant to make hard calls, such as closing an underperforming location, renegotiating with a supplier, or winding up a company, because doing so might trigger a call on the guarantee. That hesitation can make a recoverable situation worse.
If nothing changes here, the pattern repeats: business owners keep signing guarantees as a formality, and only understand what they’ve agreed to when a demand letter arrives.
That’s exactly what happened to our café owner. When the business closed, the landlord didn’t just claim the unpaid rent, they claimed the rent for the remaining three and a half years left on the lease. She hadn’t realised the guarantee didn’t end when the business did.
For our wholesaler client, a dispute over faulty stock led to an unpaid invoice, and the supplier pursued the director personally rather than negotiating with the company, which is exactly what the guarantee was there to let them do.
And the tradie who’d guaranteed the equipment lease found out the hard way that after the vehicles were repossessed and sold at a loss, he was still personally liable for the shortfall between the sale price and the remaining balance owed.
In another matter, we acted for a client owed on five outstanding invoices, with the debtor company claiming solvency despite repeated non-payment. Rather than escalating straight to statutory demand enforcement, we pursued the director who had personally guaranteed the debt, and resolved it through a deed of release, avoiding the delay and cost of formal insolvency proceedings while still getting our client paid.
Don’t wait for a demand letter to discover the true cost of a personal guarantee. Contact Prosper Law’s experienced contract lawyers to review the clause and help protect your personal assets before you sign.
How to protect yourself before you sign
A personal guarantee isn’t automatically a dealbreaker. Sometimes it’s genuinely unavoidable, particularly for a new company with limited trading history. What matters is knowing it’s there, understanding its scope, and negotiating it down where you can. Before signing any contract with a guarantee clause, whatever type of contract it is:
- Read for the trigger, not just the existence, of the guarantee: Is it a full guarantee for the entire term of the contract, or can it be limited to a set period (e.g. the first 12–24 months) or a capped dollar amount?
- Check whether it’s a guarantee or an indemnity (they’re not the same): An indemnity can expose you to a broader range of costs (like legal fees and shortfalls) than a straight guarantee.
- Ask about alternative security: Landlords, lenders and suppliers are often willing to accept a bank guarantee, a larger bond, or a security deposit in place of, or alongside, a reduced personal guarantee.
- Negotiate a release clause: Some guarantees can be structured to fall away once the company meets certain conditions, for example a set trading period without default, or the business reaching a revenue threshold.
- Get the clause reviewed before signing, not after: Once signed, your options shrink considerably.
What to avoid: signing “as is” because the rest of the deal feels settled, or assuming a verbal assurance from the other party (“we’d never actually enforce this”) has any legal weight. It doesn’t.
If you’re currently negotiating a lease, loan, finance agreement or supplier contract and a personal guarantee clause has come up, get it reviewed before you sign. That’s the point where you actually have leverage to change it.
Get your contract reviewed before you sign. Reach out to Prosper Law’s contract lawyers for assistance.
Frequently Asked Questions
What happens if I've already signed a personal guarantee?
The clause is generally binding once signed, but there may still be room to negotiate a variation, particularly if the business relationship is ongoing and the other party wants to keep you as a tenant, borrower or customer. Get advice on your specific wording before assuming the worst.
Is a personal guarantee a short-term or long-term risk?
It’s long-term by design. Most guarantees run for the full length of the contract, not just an initial period, unless that’s specifically negotiated.
Who is most likely to be asked for one?
Newer companies, businesses without an established trading history or strong balance sheet, and smaller operators generally. Established companies with a track record have more leverage to avoid or limit them.
What's the first step if I'm reviewing a contract right now?
Identify every clause that references a guarantor, indemnity, or personal liability before you focus on commercial terms like rent, price or interest rate. Those clauses determine your actual downside risk.
About the Author
Farrah Motley
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