Do I need a personal guarantee for a business loan?

Why lenders require personal guarantees

A company is a separate legal entity. Without a guarantee, the lender's only recovery option if the company fails is the company's own assets and any specific security (mortgage, equipment charge, debtor assignment). The personal guarantee gives the lender access to the directors' personal assets, dramatically expanding recovery options. NZ lender pricing assumes the guarantee is in place.

What you become liable for

• The full principal balance of the loan.
• Accrued and penalty interest.
• Recovery costs (legal fees, enforcement costs, sale costs of pursued assets).
• Other obligations of the company under the loan documents (e.g., facility fees).

The lender does not have to exhaust the company's assets first — it can come straight to the guarantor in many guarantee structures.

Negotiation points

• Cap on the guarantee. Limit the dollar amount you guarantee (rather than full balance + costs).
• Facility-specific. Limit the guarantee to the specific loan, not "all moneys" present and future.
• Release triggers. Guarantee falls away when the loan is paid below a threshold, or after a clean-conduct period.
• Joint vs joint-and-several. If multiple directors guarantee, joint liability splits the obligation; joint-and-several leaves each director liable for the whole.
• Notice requirements. Notice before enforcement; cure periods.

Banks tend to be more flexible on these points for larger deals or established borrowers. Alternative lenders are usually firmer on standard terms.

When is a guarantee not required?

• Sole traders — personal liability is automatic, no separate guarantee.
• Some property-secured deals where the LVR is very low and the lender's recovery is fully covered by the property — rare in business lending.
• Some specific government-backed schemes (rare in NZ for SME lending).