Personal Guarantees in New Zealand

If you’re running a small business, it’s pretty common to be asked to sign a personal guarantee – especially when you’re applying for finance, leasing premises, or setting up accounts with key suppliers.

On the surface, it can feel like “just another form” you need to sign to keep things moving.

But personal guarantees in New Zealand can carry serious risk, because they can make you personally responsible for business debts even if you operate through a limited liability company.

Below, we break down what a personal guarantee is, when you’ll see one, what the key red flags are, and how you can negotiate and manage the risk – so you’re protected from day one.

What Is A Personal Guarantee (And Why Do Businesses Get Asked To Sign One)?

A personal guarantee is a legal promise by an individual (often a director or shareholder) to pay money owed by a business if the business doesn’t pay.

In practice, it’s usually used when a lender, landlord, or supplier thinks the business might not have enough assets (or a long enough trading history) to be a low-risk customer. Instead of relying only on the company’s ability to pay, they want another layer of protection – you.

Personal guarantees are common in New Zealand for:

Bank lending and business finance (loans, overdrafts, equipment finance)
Commercial premises (leases, deeds of renewal, variations, and sometimes even “licences to occupy”)
Trade credit accounts (stock on credit, ongoing supply arrangements)
Vehicle leasing and fleet arrangements
Service contracts where the supplier is taking on risk (for example, large up-front work)

It’s worth saying upfront: personal guarantees aren’t automatically “bad”. Sometimes they’re the price of getting a lease signed, opening a trade account, or securing the funding you need to grow.

The key is making sure you understand exactly what you’re signing – and that the terms are proportionate to the commercial deal.

Does A Personal Guarantee “Override” Limited Liability?

It can, to the extent it creates a separate personal obligation.

One of the main reasons business owners set up a company is to get the benefit of limited liability. Generally speaking, if the company incurs debts, it’s the company that’s responsible (not you personally).

However, if you personally sign a guarantee, you can be creating a separate legal obligation that sits alongside the company’s obligations. That means if the business defaults, the creditor may pursue the guarantor personally (subject to the wording and any limits in the guarantee).

This is why it’s so important to weigh up the risk and make sure your overall structure and documentation is working together. For example, your Company Constitution and your internal governance documents should align with how you’re taking on commitments as a director.

When Will You See Personal Guarantees In New Zealand?

Personal guarantees in New Zealand tend to come up at key “growth” moments – when your business is taking on bigger fixed commitments or relying on external parties.

Commercial Leases And Premises

If you’re signing a lease for an office, retail space, warehouse, or workshop, a landlord may require the directors (or sometimes the shareholders) to personally guarantee the tenant’s obligations.

That’s especially common where:

your company is newly incorporated
your business doesn’t have a long trading history
you don’t have strong financials yet
the landlord is committing to a long lease term

A lease can be a major business commitment, so it’s worth getting the documents reviewed before you sign – including any guarantee clauses or “separate” guarantee documents. If you’re negotiating terms, this is also where a Commercial Lease Review can be especially helpful, because guarantees are often bundled into a package of lease obligations.

Trade Credit And Supplier Accounts

Supplier credit applications are one of the most common “quiet” places personal guarantees appear.

You might be opening an account to buy goods or materials on 20-day or 30-day terms. The supplier may include a personal guarantee in the fine print of the credit application or their terms and conditions.

This can be risky because:

credit limits can increase over time
interest and debt collection costs may apply if you’re late
the guarantee may cover all future supply (not just one order)

If you’re regularly purchasing on credit, it’s worth making sure your Terms Of Trade and supplier arrangements are clear, and that you’re not accepting obligations you didn’t intend to take on.

Loans, Equipment Finance, And Other Funding

When you apply for business funding, it’s common for the lender to ask directors to personally guarantee the loan – particularly for small businesses and startups.

You might also see related security arrangements (like a security interest over business assets). The documentation is often detailed, and the implications can be long-lasting even if you refinance or restructure later.

Getting legal advice early is a smart move here, because it’s easy to assume the obligations end when you “move banks” or change providers – but that’s not always how the paperwork works.

What Are The Key Risks Of Signing A Personal Guarantee?

A personal guarantee can expose you to financial risk well beyond what you expect when you sign it. Here are some of the biggest issues business owners run into.

You Can Become Personally Liable For The Debt

This is the core risk.

If the company can’t pay, the creditor may pursue you personally. Depending on the wording, they may be able to:

demand payment from you without first exhausting recovery options against the company
charge interest, default fees, and enforcement costs
take legal action and obtain judgment against you

This can affect your personal finances and assets, and may also impact your ability to access personal credit in the future.

The Guarantee Might Be “Unlimited”

Some guarantees are capped (for example, up to a fixed amount). Others are not.

An “unlimited” guarantee could mean you’re guaranteeing:

all amounts owing now and in the future
interest and fees
costs of enforcement (including legal costs)

In a worst-case scenario, the amount can become much larger than the original value of what you were trying to secure (like a modest trade account).

You Might Be Guaranteeing More Than You Think

Guarantees can be drafted broadly. It’s not unusual for them to cover:

“all obligations” under an agreement (not just payment)
renewals, variations, and extensions of the main agreement
additional facilities or additional supply provided later

This is one reason generic documents are risky. Even if the “commercial deal” is simple, the legal wording might not be.

Joint And Several Liability (If More Than One Person Signs)

If two directors sign a guarantee, the document may say your liability is “joint and several”. In practical terms, that can mean the creditor can pursue either guarantor for the full amount (not just “your share”).

You may still have rights to seek contribution from the other guarantor, but that can involve its own disputes and costs – and it’s not always straightforward if the other person can’t pay.

If you’re going into business with someone else, it’s worth setting expectations early in a Shareholders Agreement, so everyone is clear on decision-making, finance commitments, and what happens if things don’t go to plan.

Personal Guarantees Can Create Relationship And Governance Issues

Here’s a common scenario:

You and a co-founder both run the company. One of you signs a personal guarantee for a lease or supplier contract. Later, the business relationship breaks down – but the guarantee remains.

Even if you resign as a director or sell your shares, you may still be on the hook unless the creditor formally releases you. That release isn’t automatic.

This is why, when ownership is changing, you should look at the bigger picture and ensure the right legal steps are taken – including documenting the share change correctly (for example, a share transfer process), and dealing with guarantees as part of exit negotiations.

What Should You Look For Before You Sign A Personal Guarantee?

Before you sign, it helps to slow down and do a practical “risk check”. The goal isn’t to make everything perfect – it’s to avoid signing something you don’t understand, or that exposes you to unnecessary risk.

1. Who Is The Creditor And What Agreement Is The Guarantee Linked To?

Start by identifying:

who you are guaranteeing (the company’s obligations to which creditor)
what document the guarantee supports (lease, loan, credit account, service agreement)
whether the guarantee is in the main contract or a separate document

If the guarantee is in a separate form, make sure you still get that document reviewed – it’s easy to overlook it when you’re focused on the “main” contract.

2. Is The Guarantee Capped Or Unlimited?

A cap can significantly reduce your exposure and make the risk more manageable. If there’s no cap, consider whether you can negotiate one.

Even if the other side won’t accept a low cap, sometimes a cap tied to a credit limit (or a fixed portion of expected liability) is a reasonable middle ground.

3. Are There Extra Costs And Indemnities?

Guarantees are often paired with an “indemnity”. While the two terms are related, an indemnity can sometimes be drafted even more broadly than a guarantee.

Also check for:

default interest clauses
debt collection fees
legal costs on a “solicitor-client” basis (which can be higher than standard)

4. How Can You Get Released From The Guarantee?

Ask upfront:

Does the guarantee end after a certain date?
Does it continue through renewals and variations?
If you stop being a director/shareholder, can you be released?
What is the formal release process?

If the business grows, you might later be able to renegotiate or remove the guarantee. But you’ll want to know what the pathway looks like.

5. Are You Signing Personally Or As A Director?

This is a big one: if you’re signing a personal guarantee, you’re generally signing in your personal capacity, not just as a director on behalf of the company.

Don’t assume that adding your title (like “Director”) changes the nature of the obligation. The wording of the document matters more than the way the signature block looks.

How Can You Reduce The Risk Of A Personal Guarantee?

You won’t always be able to avoid a personal guarantee – especially early on. But you can often reduce the risk with the right approach.

Negotiate The Scope (Not Just The Price)

Business owners often focus on the commercial terms (rent amount, interest rate, credit limit). But the scope of the guarantee can matter just as much.

Depending on the deal, you might try negotiating:

a monetary cap (a maximum amount you’ll be liable for)
a time limit (for example, the first 12 months only)
clear trigger events (when the creditor can call on the guarantee)
removal once the company meets milestones (trading history, financial thresholds, or a bond being paid)

Limit Who Signs (Where Possible)

If multiple directors are being asked to sign, consider whether it’s necessary for everyone to do so.

Sometimes the creditor will insist. Sometimes they’ll accept one guarantor, particularly if there are other risk mitigations (like a bond or upfront payments).

Get The Underlying Contract Right

Remember: the guarantee usually follows the main contract.

If the lease or supply contract is one-sided (for example, heavy penalty clauses, unclear termination rights, or automatic renewals), the guarantee magnifies that risk personally.

Having a lawyer review and, where needed, negotiate the core terms can reduce the chance that you’ll be personally exposed to unexpected liabilities later.

Keep Strong Internal Records And Controls

Even if the guarantee is unavoidable, you can protect yourself by running the business in a way that reduces the likelihood of default.

That might include:

tight credit control processes (invoice follow-up, deposits, payment milestones)
clear customer contracting to reduce disputes and late payments
up-to-date governance documents and decision-making processes

If you’re taking on significant obligations, it can also help to document key roles and responsibilities properly – for example, having a solid Employment Contract for senior hires who manage finance, operations, or procurement.

Think About The “What If” Scenarios Early

It can feel uncomfortable to think about worst-case outcomes when you’re building something exciting.

But the best time to manage risk is before you sign.

For example:

If you sell the business, will the buyer take over the lease and will the landlord release your guarantee?
If you bring on investors, will the funding structure reduce the need for personal guarantees?
If a co-founder leaves, who remains liable and how will you re-balance risk?

This kind of planning isn’t about being pessimistic – it’s about building a business that can grow without taking on unnecessary personal exposure.

Key Takeaways

Personal guarantees in New Zealand are common for small businesses, especially for commercial leases, loans, and supplier credit accounts.
By signing a personal guarantee, you may become personally liable for business debts even if you operate through a limited liability company.
Key risks include unlimited liability, broad indemnities, joint and several liability between guarantors, and guarantees that can continue even after you exit the business (unless you’re formally released).
Before signing, check the scope, whether it’s capped, what costs apply, and how (if at all) you can be released from the guarantee.
You may be able to reduce risk by negotiating a cap or time limit, limiting who signs, and making sure the underlying contract terms are fair and clear.
Because guarantees can be drafted in a way that significantly increases your exposure, it’s worth getting tailored legal advice before you sign.

This article is general information only and doesn’t take into account your circumstances. It isn’t legal advice.

If you’d like help reviewing or negotiating a personal guarantee (or the contract it sits alongside), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.

Personal Guarantees In New Zealand: Risks And Key Considerations