When a customer company collapses, one of the first questions credit teams ask is: do we have a personal guarantee? In the current environment, where liquidations routinely leave little or nothing for unsecured creditors, that answer can be the difference between a full write-off and a meaningful recovery. But not all guarantors are created equal, and our experience in collections and disputes has made one thing very clear: who signs the guarantee matters almost as much as having one.

Personal Guarantees can be the difference maker

In brief, a personal guarantee is a promise from an individual to stand behind the debt of a company if the company cannot pay. Once the liquidator has realised assets and taken fees, unsecured trade creditors are usually left with cents in the dollar at best. Having a guarantee lets you step out of that queue and pursue the guarantor directly for the residual balance. From a collections perspective, that leverage often drives faster, more realistic repayment discussions, or at least gives you a viable enforcement path.

General Rule: Directors & Shareholders Only

The starting point is straightforward: where you are trading with a company, your first preference should be for the guarantor to be a director and/or shareholder of that company. They are the people who control the business, understand its financial position, and directly benefit from any increase in credit terms, limits or supply. Legally, that flows into the concept of consideration, there is a clear exchange of value. The company gets trade terms and flexibility; the owner gets to grow the business; you get the comfort of a personal promise from the person with the most skin in the game.

Courts are generally less sympathetic when an experienced director later argues they did not understand the guarantee they signed, particularly where they applied for the account and guarantee at the same time.

Employees & Relatives as Guarantors are tricky

By contrast, third-party guarantors – like staff or relatives – can raise more credible arguments about pressure, lack of information, or lack of benefit, which complicates enforcement and increases legal cost. We regularly see applications where the guarantor is an office administrator, quantity surveyor, accountant, parent or in-law. On paper, the guarantee may look fine. In practice, when the account goes bad, these guarantors often defend proceedings by saying they were pressured to sign by the director, or thought they were simply providing a trade reference. Even if you ultimately succeed, you spend more time and money dealing with arguments about coercion, unfairness and lack of understanding than you would with a director guarantor.

There is also a harder legal question: what benefit did that third party actually receive? If they are not an owner, and do not share in the profits, it can be harder to prove that they received meaningful consideration for putting their personal balance sheet on the line. That does not automatically make the guarantee invalid, but it does create more risk and uncertainty than most credit teams want when they are already dealing with a default.

Do these basic checks

Sometimes, a third-party guarantor is commercially acceptable, for example, parents backing a younger director, or a long-standing business partner outside the Companies Office share register. Where that happens, it makes sense to slow down and add a couple of safeguards:

• Contact the proposed guarantor directly (not through the director) to explain, in plain language, what the guarantee means and that it can cover the full exposure on the account, not just the opening limit.
• Ask them to confirm in writing that they understand those obligations and still wish to proceed as guarantor.
• Flag clearly in your internal recommendation that the guarantor is a third party, so the business unit can factor that into credit limits, security mix, and appetite to enforce later.

The next time you see a name in the guarantor box, ask yourself who this person is in relation to the business, and whether they genuinely share in the upside you are helping to create. Directors and shareholders should be your default choice; employees and distant relatives should trigger extra questions, extra documentation, or a rethink of the credit limit. A guarantee is only as useful as the person who stands behind it – so it would make sense to be just as deliberate about who signs as you are about whether you get one at all.