Do lenders require a director guarantee on commercial property loans?

A company can be wound up and a trust can be emptied. The guarantee ensures the people behind the entity stand behind the loan. Without it, a lender is exposed to a shell borrower whose only asset is the property, and commercial LVRs would be far lower. Lenders also see the guarantee as an alignment tool: the director who has signed personally will not walk away from a difficult property.

If the borrower defaults and the property sells for less than the debt plus costs, the lender can pursue the guarantors for the shortfall from their personal assets, including the family home if it is not otherwise protected. Joint and several means the lender can pursue any one guarantor for the entire amount and leave that guarantor to recover from the others. This is why spouses who are directors on paper only should think carefully about giving guarantees, and why asset protection structures that separate the home from the business need to be set up before borrowing, not after.

Some lenders will accept a limited guarantee capped at a dollar amount or a percentage of the loan, particularly where there are several guarantors, where the LVR is low, or where the borrower has a strong track record. A guarantee limited to 20 or 25 per cent of the facility is a reasonable ask on a well-secured loan. Independent legal advice is required before signing, and the solicitor should explain the extent of the exposure.

Guarantees are released when the loan is repaid or refinanced. A director leaving the company does not automatically end their guarantee; it has to be formally released by the lender, which usually requires a replacement guarantor or a reduction in the facility. Guarantees also commonly extend to future facilities with the same lender under all-monies clauses, so a guarantee given for one property loan can cover an overdraft taken out later. Read the clause.