Indemnity Guarantee: What Businesses Need To Know In Australia

If you’ve ever tried to secure finance, sign a commercial lease, win a supply contract, or join a major customer’s vendor panel, you may have been asked to sign an indemnity guarantee.

It can feel like one more piece of paperwork standing between you and a deal - but an indemnity guarantee can also be a high-risk document if you sign it without understanding what it does (and what it exposes you to).

In this guide, we’ll break down what an indemnity guarantee is, how it works in practice, where you’re most likely to see it as a small business or startup in Australia, and what you can do to negotiate fairer terms.

Tip: “Indemnity guarantee”, “guarantee indemnity”, and “guarantee and indemnity agreement” are often used interchangeably. The wording matters, but the risk usually comes down to the same thing: someone is asking you to promise you’ll cover losses if something goes wrong.

Important: This article is general information only and doesn’t constitute legal advice. Indemnity guarantees can be drafted very differently, and your rights and risks will depend on the wording and your circumstances.

What Is An Indemnity Guarantee (And Why Are You Being Asked For One)?

An indemnity guarantee is a legal promise to cover someone else’s loss or debt.

In a business context, it’s commonly used when the other party wants extra comfort that they’ll be paid, even if your business can’t pay. This is especially common where:

• your business is new (limited trading history);
• your business has limited assets;
• you’re a company (so the other side can’t automatically pursue directors/shareholders personally); or
• the amounts involved are significant and the other side wants stronger “security”.

Practically, an indemnity guarantee often means a director or founder becomes personally responsible for an obligation that would otherwise sit with the business.

Indemnity vs Guarantee: What’s The Difference?

People often ask whether a guarantee is “less serious” than an indemnity. The short answer is: an indemnity is often broader and harsher than a guarantee, depending on drafting.

• A guarantee is usually a secondary promise: the guarantor agrees to pay if the primary party (your business) doesn’t pay.
• An indemnity is often drafted as a primary obligation: the indemnifier agrees to cover loss. In some documents, this can be broad enough to still apply even if there’s a problem with the underlying arrangement - but it depends on the exact wording and the circumstances.

Many documents combine both in a single guarantee and indemnity agreement to give the other party multiple pathways to recover money.

Why Does This Matter For Startups?

Startups often operate through a company structure to protect founders from personal liability. However, once you sign an indemnity guarantee, you may be contractually reintroducing personal liability through the back door.

That doesn’t mean you should never sign one - but you should treat it as a serious risk decision, just like taking on debt or giving security over assets.

Common Scenarios Where Small Businesses See Indemnity Guarantees

You’ll see an indemnity guarantee across a range of everyday commercial situations. Here are some of the most common ones for Australian small businesses.

1) Loans And Business Finance

Lenders commonly require a director’s guarantee and indemnity when lending to a small company, particularly where the company doesn’t have substantial assets.

Depending on the facility, the lender may also ask for security over business assets through a document like a General Security Agreement. This is different from an indemnity guarantee, but they are often used together to strengthen the lender’s position.

If you’re entering finance arrangements, it’s also common to be presented with a secured loan agreement that includes (or is paired with) personal guarantee and indemnity obligations.

2) Commercial Leases

Landlords often ask directors of a tenant company to sign a personal guarantee and indemnity to cover:

• unpaid rent and outgoings;
• damage to the premises;
• make-good obligations at the end of the lease; and
• legal costs if the landlord needs to enforce the lease.

Even where your business is structured as a company, the landlord may insist on an indemnity guarantee because, from their perspective, it’s a way to reduce the risk of the tenant company folding and leaving them unpaid.

3) Supplier Credit Terms And Trade Accounts

When you apply for supplier credit (for example, stock on account, 30-day payment terms, or ongoing supply), the supplier may require a guarantee and indemnity from a director.

This is common in industries like construction, wholesale, manufacturing, and hospitality, where accounts can grow quickly and suppliers want a direct avenue to recover unpaid invoices.

4) Customer Contracts And Tender Requirements

If you’re contracting with a large customer (or a government-adjacent entity), you may see indemnities in the main contract and, occasionally, a separate indemnity guarantee from your entity or parent company.

In some supply chains, a head contractor may require subcontractors to provide broad indemnities and guarantees to match “back-to-back” obligations upstream.

5) Company Groups And Related Entities

If you have a group structure (for example, an operating company and a holding company), a counterparty may request an indemnity guarantee from another group entity for comfort.

That can be commercially normal - but it’s still important to check whether you’re creating cross-liability within the group that could undermine the reason you separated entities in the first place.

What A Guarantee And Indemnity Agreement Usually Covers

An indemnity guarantee can be short and simple, or it can be a dense, multi-page document. Either way, there are a few recurring “pressure points” you should understand before you sign.

The “Guaranteed” Obligations

Start by identifying exactly what obligations are being guaranteed/indemnified. Is it:

• all amounts owing under a contract (now and in the future)?
• only a specific invoice or facility limit?
• rent and make-good only (for leases)?
• damages for breach, including indirect losses?

If it’s drafted as “all moneys” or “all obligations of any kind”, that’s a red flag for startups because the exposure can become unpredictable.

Duration (When Does It End?)

Many indemnity guarantees continue until the creditor releases you in writing - even if:

• the contract is renewed or varied;
• your role changes (for example, you step down as director); or
• your business relationship “sort of” ends informally.

For founders, this is a common trap: you may exit the business, but the guarantee can remain on foot unless formally released.

“On Demand” Payment

Some documents allow the other party to demand payment immediately from the guarantor/indemnifier, sometimes without needing to first pursue the company - but whether (and how quickly) this can happen depends on the drafting and the facts of the default.

This can affect your personal cashflow and negotiating position, especially in a dispute.

Costs And Expenses (Including Legal Costs)

Many indemnity guarantees include a broad obligation to pay enforcement costs, including legal fees on an indemnity basis (which can be more generous than standard “party/party” legal costs).

This means the exposure may be more than just the underlying debt.

Security, Set-Off, And Other “Extra Rights”

Sometimes a guarantee and indemnity agreement will include rights such as:

• set-off (they can apply amounts they owe you against the guaranteed debt);
• assignment (they can transfer the benefit of the guarantee to someone else);
• charging clauses (giving them a form of security interest); or
• consents to variations of the underlying contract without notifying you.

Key Risks For Directors And Founders (And How To Manage Them)

Signing an indemnity guarantee doesn’t automatically mean “don’t do it”. But you should treat it like taking on personal risk for a business decision.

Here are the major risks we commonly see.

1) Personal Liability (Even If You Operate Through A Company)

Many founders choose a company structure because it generally limits personal exposure. But a personal guarantee/indemnity can override that commercial protection in practice.

If the company can’t pay, the creditor may pursue you personally - potentially including your personal assets (depending on your circumstances and enforcement pathways).

This is why it’s important to understand the broader concept of personal guarantees before signing anything that sounds like “director support”.

2) “Unlimited” Or Uncapped Exposure

One of the biggest commercial issues is where the guarantee/indemnity is not capped. If the business relationship grows, your personal exposure grows too - sometimes without you noticing.

Where possible, consider negotiating:

• a fixed dollar cap;
• a cap linked to a facility limit (for finance);
• a cap linked to a bond amount (for leases); or
• a cap limited to specific invoices or a defined time period.

3) Liability For Things Outside Your Control

Indemnities can be drafted to cover broad categories of “loss”, including loss caused by third parties, subcontractors, or operational issues you didn’t directly control.

For example, if your business has multiple directors, one director’s decision could trigger a breach - but all guarantors/indemnifiers might be liable, depending on how the document is drafted.

4) Guarantee Survives Changes To The Deal

A guarantee and indemnity agreement often says the guarantor remains liable even if:

• the underlying contract is varied;
• time for payment is extended;
• the creditor grants indulgences; or
• the creditor takes (or fails to take) enforcement action against the company.

This can be surprising if you assume that “material changes” would require your fresh consent. In many standard forms, they don’t.

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

If two co-founders sign as guarantors, it’s common to see “joint and several liability”. This can mean the creditor can pursue either of you for the full amount (not just 50/50), leaving you to sort out contribution between yourselves later.

If you have co-founders, it’s also worth making sure your internal arrangements are clear - for example, through a Shareholders Agreement that covers decision-making, funding obligations, and what happens if one founder exits.

How To Negotiate An Indemnity Guarantee (Practical Tips That Usually Help)

When you’re negotiating with a landlord, supplier, lender, or customer, you may not have total leverage - but you often have more options than you think.

Here are practical negotiation levers that can reduce your risk while still getting the deal done.

Ask: Can We Remove The Personal Guarantee Entirely?

It’s always worth asking, especially if:

• your business has a solid trading history;
• you can provide alternative comfort (e.g. a security deposit, bank guarantee, or upfront payment);
• the contract value is modest; or
• the other party is competing for your business.

Sometimes the “personal guarantee” is in the template but isn’t a true commercial requirement.

Cap The Amount

If the other side insists on an indemnity guarantee, a cap is one of the most meaningful protections you can negotiate.

A cap can also make your personal risk insurable or at least measurable, which matters for long-term planning.

Limit It To Specific Obligations

Try to narrow the guarantee/indemnity so it only applies to:

• payment obligations (not performance obligations);
• specific invoices issued before a certain date;
• rent only (excluding make-good or damages); or
• a single agreement (excluding “any other agreement between the parties”).

Put An End Date (Or A Release Mechanism) In Writing

A practical approach is to negotiate a clear release event, such as:

• after 12 months of on-time payments;
• once the account is brought within a limit; or
• once the lease is assigned or renewed with updated terms.

If you can’t secure an automatic release, try to at least secure a written review process so you can revisit the issue later.

Check Whether The Guarantee Can Be Triggered Too Easily

Some documents are drafted so widely that a minor administrative breach could trigger liability. Consider negotiating clearer triggers, cure periods, or notice requirements before any demand can be made against you.

Make Sure The Underlying Contract Is Tight First

This is an underrated point: a guarantee/indemnity is only as risky as the obligations it supports.

If the underlying contract is vague, one-sided, or unclear on key issues (like payment terms, deliverables, variation processes, and termination rights), your indemnity guarantee becomes much more dangerous.

In many cases, you’ll want the guarantee and indemnity documented properly (and consistently with the main deal) in something like a Deed of Guarantee and Indemnity that has been reviewed for your specific circumstances.

Key Takeaways

• An indemnity guarantee is a serious legal promise to cover another party’s loss or debt, and it can expose directors or founders to personal liability.
• In Australia, indemnity guarantees commonly appear in loans and finance, commercial leases, supplier credit terms, and larger customer/vendor contracts.
• An indemnity is often broader than a guarantee, and many documents combine both into a guarantee and indemnity agreement to maximise recovery options.
• Key risk areas include uncapped liability, some “on demand” payment structures (depending on the drafting), broad legal cost clauses, and guarantees that can survive contract changes or founder exits unless released.
• You can often negotiate practical protections like a dollar cap, narrower scope, clearer triggers, and a written release mechanism.
• It’s important to review both the guarantee/indemnity and the underlying contract, because unclear obligations can dramatically increase your exposure.

If you’d like a consultation on an indemnity guarantee (or a guarantee and indemnity agreement) for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.