Do I need a guarantor for my business loan?

There are 2 types of guarantees:

• First party guarantee - the most common type, where you guarantee the loan with security in the form of an asset that you (the borrower) own
• Third party guarantee - in some cases we require someone else (a person or entity that is not the borrower) to guarantee your business loan with security from 1 of their assets.

What are they guaranteeing?

A guarantee ensures that if you cannot make your business loan repayments, the guarantor will pay them for you. In most cases, such as where the Code of Banking Practice applies, the lender will ask the guarantor for a limited guarantee. This usually covers the debt plus any additional costs or interest incurred if loan repayments are delayed.

It is important for guarantors to remember that in some cases, where business loan repayments are not being made, the guarantor may be required to sell their asset to cover the remaining debt, or offer further security.

What if I’m asked to be a guarantor?

This obligation shouldn't be entered into lightly. Before making the commitment, make sure:

• You're comfortable the borrower can meet their business loan repayments and that you are willing to cover their repayments if they can't.
• Your own financial plans won't be compromised. Even though you're not borrowing funds for yourself, you may be tying up equity in your property and restricting your ability to borrow funds in future.
• You're happy to stick it out. You won't be able to pull out of your obligation as guarantor unless this is agreed to by both the lender and borrower, or until the business loan has been repaid.

Whatever your circumstances, always speak to your financial adviser and obtain independent legal advice before signing up as a guarantor.

If you’d like to discuss your options with a business manager, complete our short enquiry form and we'll contact you or call us on 132 142 (8am-8pm, Mon - Fri).