Personal guarantees: what a builder puts at risk

Most builders understand that a company protects its owners from its debts. That protection is the reason many people trade through a company at all. It is also the protection that a personal guarantee takes away. When a supplier, lender, landlord or other party asks a director or sole trader to sign a guarantee, they are asking for a personal promise to pay the debt if the business does not. The company may still owe the money, but so, now, does the individual who signed.

The request usually arrives at a sensible moment. A supplier wants security before extending credit, a finance provider wants a second layer of comfort before approving equipment, or a landlord wants assurance before a lease of a yard or an office. The guarantee often looks like a formality, a page to sign at the end of a process that has already been agreed. It is worth treating it as the most important document in the process, because the terms it contains may outlast the business, the contract and your memory of why you signed.

This article explains what a personal guarantee does, how it sits alongside a company, which terms decide how much of your own property is exposed, and what to check before you sign. It is general information for a licensed builder, not advice on your own position. Where a guarantee is on the table, get advice from a solicitor and your accountant before you sign.

What a personal guarantee actually does

A guarantee is a promise made by one party to answer for another party’s obligation if that party does not perform it. In the building context the obligation is usually a debt: the price of materials on credit, the lease payments on a yard, the repayments on equipment or a facility. The guarantor is the person who promises to pay. The debtor remains liable, so the creditor can pursue either the company or the guarantor, and often both.

The effect is that the guarantor becomes a second debtor. That is a different position from the director who is simply an officer of the company, because the company’s limited liability does not shield the guarantor for the guaranteed debt. If the company cannot pay, the creditor is entitled to look to the guarantor under the terms of the document. A guarantee therefore turns a company debt into a personal exposure, and it does so by a promise in writing that the guarantor has signed.

Why sole traders and directors are asked to sign

A sole trader has no company to stand behind. The business and the person are the same legal entity, so business debts are already personal. A guarantee matters less for a sole trader in one sense, because there is no separate company to protect, and more in another, because a sole trader may be asked to guarantee a company that another party controls, or a family entity in which they hold a role. Read the document to see exactly whose debt it secures, rather than assuming it is the same as your own trading position.

A director is asked to sign for a different reason. The company is the trading entity, and the other party wants a person behind it. That is a reasonable request from the creditor’s point of view, because a company that has traded for a short time or has modest assets gives limited comfort on its own. The request is a signal that the other party sees a risk, and the director should ask what the risk is before agreeing to take on part of it personally.

How a guarantee sits alongside the company

The company is the primary debtor. The guarantee is a secondary promise that applies when the primary debtor does not pay. In practice this means the creditor usually has to look first to the company, but the guarantee gives it a right to pursue the guarantor if the company does not pay or cannot be recovered. The terms of the guarantee define that right. Some guarantees allow the creditor to choose whom to pursue without going to the company first, and those are the ones that bring the most risk to the individual.

The company’s protection and the guarantor’s exposure can therefore run in opposite directions. The more the company has traded and the more it owes, the more likely the guarantee is to be called. A company in difficulty is exactly the situation in which a creditor turns to the guarantor, and the guarantor is often the person least able to absorb the loss at that moment. The guarantee has been designed for that moment, which is why its terms need to be read with it in mind.

The terms that decide how much you are exposed

Four features of a guarantee decide its size. The first is the cap. A guarantee can be unlimited, in which case it covers whatever the company owes, including interest and the costs of recovery, or it can be limited to a stated amount. An unlimited guarantee is the more common request and the more dangerous one, because its exposure is not known when it is signed. The second is whether the guarantee is a single transaction guarantee or a continuing one. A continuing guarantee covers future debts as well as the present one, so it can keep growing for as long as the relationship lasts.

The third is whether you are guaranteeing alone or jointly and severally with others. Where several people guarantee the same debt, a creditor may be able to pursue any one of them for the whole amount, not just their share. That means the most exposed guarantor is not necessarily the one who owns the most, but the one with the most assets that the creditor can reach. The fourth is what triggers the guarantee and what it costs. Default clauses, interest, the cost of enforcement and the right to take security over your property all add to the exposure, and they are often found in the general conditions rather than on the first page.

Read the whole document, including the conditions and any schedules. A guarantee that looks modest on the front page can carry wording elsewhere that extends it considerably. If you cannot see the cap, the duration or the list of people bound, you are not in a position to judge the risk.

What survives a sale, a restructure or a change of directors

A guarantee is not automatically extinguished when the business changes hands. Many guarantees continue after a sale of the company, a change of directors, a transfer of the business to a new entity or a restructure, unless the terms say otherwise or the creditor agrees to release you. The assumption that leaving the company ends your liability is one of the most common and costly mistakes made by directors who have guaranteed a debt and then moved on.

If you want to end or limit a guarantee, you need to negotiate that outcome with the creditor and record it in writing. A release may be available on a sale, on a refinancing or when a replacement guarantor or security is provided. Do not assume the creditor will release you because you have resigned, sold your shares or stopped working in the business. Ask the question directly, get the answer in writing and keep the signed release with the rest of the file.

Negotiating the terms before you sign

A guarantee is a negotiated document in most commercial settings, even when the first draft looks like a standard form. A cap on the amount, a limit to a single transaction, a shorter duration, a right to be released on a sale, or a requirement that the creditor pursue the company first are all points that can be raised. Creditors frequently accept some of these, particularly when a relationship is new and the amount is modest, because a guarantee that cannot be negotiated is worth less to the creditor as well.

Be specific when you negotiate. Name the debt or the facility the guarantee secures, the amount you are prepared to guarantee and the period it should run for. A vague request for protection rarely produces wording that protects you. A precise one gives the creditor a clear choice, and gives your solicitor something concrete to draft.

Where a creditor refuses to change the wording at all, ask whether the same relationship can be secured another way, such as a deposit, a shorter payment term or a smaller credit limit. A smaller facility on clear terms can be safer for everyone than a large one that depends on a personal promise.

Keeping the record of what you signed

The signed guarantee, the version you were shown before signing and any later variation or release form the record of your liability. Keep them together, dated and in a folder you can find. The Australian Taxation Office’s guidance on record keeping for business is a useful reminder that business records need to be kept and retrievable, and the same discipline applies to a document that may be relied on years after it was signed. A guarantee that cannot be found is still enforceable against you if the creditor has a copy.

Keep a note of the date you signed, who else signed, the advice you received and any conversation in which the creditor agreed to a term that is not written in the document. Oral assurances are hard to rely on later. Put any agreed change in writing and have it signed, because the document is what a court or adjudicator will look at first.

A worked example: a builder with a company and a supplier account

Consider a builder who ran a residential company with a small crew and held a trade account with a materials supplier. When the account was opened, the supplier asked for a personal guarantee because the company had been trading for only a short time. The builder signed a continuing guarantee for the company’s account, without a cap, and without reading the conditions in full. The guarantee covered future purchases, and the builder assumed it would end when the account was closed.

Some years later the company had a difficult run of jobs, the account fell into arrears and the supplier sought to enforce the guarantee against the builder personally. The builder had by then left the company and sold his shares to a partner. He had assumed that the guarantee went with the shares and that his liability had ended. It had not. The supplier pointed to the continuing wording, and the builder had to negotiate a settlement and a release with his solicitor.

The lessons are plain. The guarantee was unlimited, continuing and personal, and the builder had not checked whether it survived his exit. A cap, a fixed term, or a written release on sale would each have changed the outcome, and each was available to be negotiated before the signature. The builder had the documents. He simply had not read them with the risk in mind.

When to get advice before you sign

Any guarantee that could reach your own property deserves advice before you sign it. A solicitor can read the wording, explain the conditions and negotiate changes. An accountant can show you how the guarantee would appear against your personal position and what it would cost if called. Neither is a substitute for the other, and neither should be asked to check the document in the minutes before a deadline. If the creditor insists on a deadline that makes independent advice impossible, that is itself information about the deal.

Builders who want to strengthen their wider business management can find the relevant topics in the PointCPD course catalogue.

The PointCPD guide to how NSW builder CPD works explains how business management learning sits within a licence holder’s CPD record.

For the structural question of whether a company or a sole trader is the right vehicle in the first place, the article on choosing between a sole trader and a company sets out the trade-offs.

Protecting yourself while the business trades

A guarantee is a risk you take on for the benefit of the business, so it should be managed like one. Keep the company’s accounts current, pay the creditor on time, and tell the guaranteeing party early if trading is becoming difficult. A creditor who hears about a problem from you is in a far better position to agree a plan than one who discovers it through a missed payment. Most guarantees are called after the warning signs have been ignored for some time, and an early conversation often keeps the guarantee out of play altogether.

Review your guarantees each year alongside the rest of the business records. Note the amounts outstanding, the terms still in force and any release you have requested. A guarantee that has been forgotten is a liability that nobody is managing, and it is the one most likely to surprise you.

Be cautious about requests that arrive in a sequence. A supplier who asks for a guarantee on one account, then a second on a lease, then a third on equipment is building up exposure one step at a time, and each request can look reasonable on its own. Keep a single list of every guarantee you have given, the party it benefits, the debt it secures and whether it is capped. Looking at that list as a whole is often the first time a builder sees how much of their personal position is tied up in the company.

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Published 14 October 2026. General information for builders, not legal, financial or engineering advice for a specific job. Check current requirements with the relevant regulator or standard before relying on them.