Guarantee vs indemnity

Definition

A guarantee is a secondary obligation — you're liable only if the primary borrower defaults. An indemnity is a primary obligation to compensate for a loss, standing on its own even if the underlying debt is unenforceable. Many personal guarantees include an indemnity to close that gap.

In plain terms

A guarantee is 'I'll pay if they don't'; an indemnity is 'I'll cover the loss whatever happens'. The indemnity is harder to escape.

Why it matters for your company

Directors asked to sign should know which they're taking on — an indemnity is broader. Better still, borrow where neither is needed: Creditcorp takes no personal guarantee. See how to avoid personal guarantees.

In practice

Picture a director being asked to sign supporting paperwork for a facility taken out by their limited company. If the paperwork is framed as a guarantee, the director's exposure only crystallises if the company itself falls into default — until that point, the obligation sits quietly in the background. If the same paperwork is framed as an indemnity, the director's promise stands on its own from the outset: it does not depend on proving the company's underlying debt was valid or enforceable, only that a loss occurred.

This difference shapes how a director should read any facility letter before signing. A clause labelled 'guarantee' invites questions about what counts as default and what notice the lender must give first. A clause labelled 'indemnity' invites a different question entirely — what counts as a loss, and how broadly that is defined — because the primary-obligation structure removes several of the defences a guarantor might otherwise raise.

How lenders read it

From a lender's perspective, an indemnity is generally viewed as the more robust form of security because it survives arguments that would otherwise defeat a guarantee, such as a defect in the original loan agreement. That is precisely why some facility documents pair a guarantee with an indemnity clause rather than relying on one alone, as noted with personal guarantees above.

For a company director, the practical pitfall is treating the two labels as interchangeable when reviewing paperwork. Assuming a document is 'just a guarantee' when it in fact contains indemnity wording can lead to a nasty surprise about how hard the obligation is to contest later. Reading the operative words, not just the heading, is the safer habit — and asking a lender or adviser to point out where any indemnity language sits within a longer agreement, as covered in how to avoid personal guarantees, is worth doing before signature.