What Is a Personal Guarantee on a Trade Account?
A personal guarantee is a promise, signed by a director or owner, to personally repay a business's trade account debt if the business itself can't. It's one of the most consequential documents a business owner signs when opening a trade account — and one of the least plainly explained.
What a Personal Guarantee Is
Ordinarily, a limited company's debts belong to the company, not its directors personally — that's the point of limited liability. A personal guarantee sets that protection aside for one specific debt: by signing it, a named individual (usually a director) agrees that if the company fails to pay what it owes on the trade account, the supplier can pursue that person's own money and personal assets to recover it.
Suppliers ask for a guarantee because a new or small company often has little trading history and limited assets of its own — a guarantee gives the supplier recourse beyond the company if the account is never paid.
Why Suppliers Ask for One
A guarantee is most often requested for newer businesses, smaller limited companies, or larger requested credit limits — anywhere the supplier judges that the company alone doesn't yet provide enough assurance. It's a standard part of the trade account application process, not a sign the applicant is being treated as high risk specifically.
What Happens If the Business Defaults
If the company can't pay and a personal guarantee is in place, the supplier can pursue the guarantor directly for the outstanding amount — potentially including legal costs — once normal debt-recovery steps against the company have failed or clearly won't succeed. This can mean a personal debt, a mark on the guarantor's own credit file, and in serious cases, legal action against personal assets. For how this typically unfolds on an account that's fallen behind, see what happens if you default on a trade account.
Can You Negotiate or Limit It?
Often, yes. It's worth asking whether the guarantee can be capped at a fixed dollar amount rather than the full account balance, limited to a set time period, or reviewed and removed once the account has an established payment history. Suppliers won't always offer this upfront, but many will agree to it if asked, particularly for an account that's been well-managed for a year or more.
Director's Guarantee vs Personal Guarantee
In practice, the two terms are usually used interchangeably in NZ trade accounts: a "director's guarantee" is simply a personal guarantee given by someone in their capacity as a company director. The legal effect is the same either way — the individual becomes personally liable, separate from the company.
Frequently Asked Questions
Does a personal guarantee expire?
Not automatically. Most remain in force for as long as the trade account is open, unless the agreement specifies an end date or it's formally released by the supplier.
Can I remove a personal guarantee after resigning as a director?
Resigning as director doesn't automatically release a personal guarantee already signed — it's a separate contract. It needs to be formally released or replaced by the supplier, so it's worth asking directly when stepping down.
What happens to a personal guarantee if the business is sold?
The guarantee stays with the individual who signed it, not the business, unless the supplier agrees to release it as part of the sale. This is easy to overlook during a sale and worth raising explicitly.
Is a personal guarantee the same as being a co-signer?
They're similar in effect — both make an individual personally liable — but a personal guarantee is specifically tied to the underlying trade account debt, rather than a separate loan agreement.
Do all trade accounts require one?
No. Established businesses with a strong trading history and sufficient company assets can sometimes open or maintain an account without one.
Modern Trade Credit, Without the Paperwork
PaidTerms decisions don't rely on personal guarantees the same way a traditional trade account does — suppliers are paid upfront and the customer's repayment plan sits with PaidTerms.
Read next: what happens if you default on a trade account, or how the application process works.
