If you have signed a personal guarantee, you may be more financially exposed than you realise.
Personal guarantees are widely used in business and are commonly required by banks, suppliers, equipment financiers and even within family lending arrangements. However, many business owners do not fully understand the ongoing risk of a personal guarantee or that in certain situations it may be possible to formally limit future liability.
At de Jonge Read®, we regularly assist business owners to assess and reduce personal guarantee exposure when circumstances change. Whether due to a company dispute, exit from a business, change in ownership or family breakdown, determining a personal guarantee can be a strategic way to protect your personal financial position.
What is a personal guarantee?
A personal guarantee is a legally binding agreement that makes you personally responsible for a company’s debt if the company cannot pay.
They are commonly required when applying for:
- Bank overdrafts and business loans
- Equipment finance and leasing facilities
- Supplier credit accounts
- Property finance arrangements involving family members
Once signed, a personal guarantee does not automatically end when circumstances change. Many people assume they will be released once a debt is reduced, refinanced or partially repaid. In reality, guarantees often remain in place until formally discharged, which may never occur without action.
When relationships change, your risk can increase
We frequently see situations where the relationship between the guarantor and the borrower has changed but the personal guarantee remains in place.
This commonly arises following:
- Divorce or family breakdown
- Disputes between business partners
- Changes in company ownership or directorship
- Withdrawal from day to day involvement in a business
- Sale of assets previously linked to the borrowing
If your guarantee remains active after these changes, you may still be personally liable for debts incurred long after you have stepped away.
What does it mean to determine a personal guarantee?
To determine a personal guarantee means formally notifying the lender in writing that you will no longer accept liability for future credit provided under that facility.
Importantly:
- You remain liable for the balance owing at the date of determination
- You remain responsible for interest and fees on that existing balance
- You are not liable for any further debt incurred after the determination date
Determining a guarantee is most effective for fluctuating credit facilities, including:
- Bank overdrafts
- Lines of credit
- Supplier trading accounts
- Floor plan or revolving finance facilities
In many cases, once a guarantee is determined, the lender may freeze the account and require a new facility to be established without the former guarantor attached.
When managed strategically, this can cap your personal exposure and prevent further financial risk.
Case Study: Family Guarantee Exposure
We assisted a father who had guaranteed his son’s business overdraft and provided security over his home.
After the son sold an investment property and partially repaid the overdraft, the father believed the guarantee and mortgage would be released. They were not.
Concerned about further drawings on the overdraft, the father determined the guarantee in writing while the outstanding balance was minimal. The bank froze the account and required the son to open a new facility under revised terms. The father’s personal liability was effectively capped at the amount owing at the date of determination.
Case Study: Director Dispute and Strategic Determination
In another matter, a minority shareholder and director was involved in a dispute with co directors and had stopped receiving income. He had personally guaranteed several company facilities, including an overdraft and a floor plan arrangement.
Attempts to resolve the dispute were being blocked.
Our client determined his personal guarantees at a time when the company’s debt levels were at their lowest point in the monthly trading cycle. This forced lenders to freeze the facilities and seek new arrangements.
Within days, the directors agreed to settle on terms that had previously been rejected.
By strategically limiting his ongoing liability, our client was able to shift the commercial balance and protect his position.
When should you consider determining a personal guarantee?
You may wish to seek advice if:
- You are exiting a business but remain exposed under signed guarantees
- You are no longer involved in management or decision making
- You are concerned about additional debt being incurred
- You are involved in a business dispute
- You are separating from a spouse or family member connected to a loan
- You want to proactively limit future personal liability
Determining a guarantee is not appropriate in every situation and must be handled carefully. The wording of the guarantee, the facility terms and the commercial relationship with the lender all matter.
However, when used correctly, it can be a powerful tool to reduce unnecessary personal risk.
Protecting Your Personal Financial Position
Many business owners only review their personal guarantees when a dispute arises or financial pressure increases. By then, the exposure may already be significant.
Early advice can help you:
- Understand exactly what you have guaranteed
- Identify whether liability can be limited
- Time a determination strategically
- Manage lender negotiations
- Protect personal assets from escalating risk
At de Jonge Read®, we work with business owners to clarify personal obligations, develop practical strategies to limit exposure and navigate disputes or business transitions with confidence.
If your circumstances have changed and you are unsure of your personal liability under a guarantee, we encourage you to seek independent advice before the risk escalates. Contact de Jonge Read® for confidential, commercially focused guidance on managing personal guarantee exposure.
Did you know?
Phoenixing is another name of business restructure. Read more about business restructures and when this can be an option for you.
