Small business owners are being cautioned to get professional advice before personally guaranteeing short-term loans, following a record surge in court actions by non-Big-Four lenders in the September quarter.
A record quarter for court action
According to the latest Alares Credit Risk Insights, non-bank lenders have steadily increased court actions since 2019 and are now at record or near-record levels, a trend that accelerated through 2023 and 2024 and has remained elevated since. By contrast, court actions by the big four banks peaked in 2024 and eased through 2025, a divergence Alares director Patrick Schweizer has linked to where banks are choosing to write credit risk. He has said the big four appear increasingly focused on lower-risk lending, such as residential mortgages and larger corporates, pushing SMEs and borrowers with weaker credit histories toward second, third and fourth-tier lenders.
Insolvency and restructuring firm Jirsch Sutherland says it is seeing that shift play out directly in its casework. “Directors aren’t taking on these loans for growth, they’re using them as a temporary lifeline to pay employees, suppliers and the ATO just to keep the doors open,” said Jirsch Sutherland Partner Malcolm Howell. “Short-term finance has always been around, but what’s changed is the number of owners turning to it when they’re already struggling, without realising what a personal guarantee can mean if the business fails.”
Why owners are borrowing this way
The pattern aligns with broader research into how Australian SMEs are financing themselves. Research released by ScotPac in June found 34 per cent of SMEs had sourced non-bank lending in the previous 12 months to support working capital. Separately, Reserve Bank of Australia research shows the non-bank share of SME lending has increased strongly since 2022, particularly for smaller loans, with the RBA noting that businesses may use higher-cost unsecured finance for short periods to manage temporary cash flow issues.
Howell says the speed of non-bank finance is a significant part of its appeal, and its risk. “Alternative and non-bank lenders have become an increasingly visible source of fast finance for small businesses, with some promoting rapid or same-day approvals,” he said. “That speed and accessibility can be attractive when a business is under cash flow pressure, but owners need to understand the cost, the terms and any personal guarantees they are signing. These loans are often secured against the assets of the business, which can make it difficult to refinance or access further finance if it’s needed. It can leave an already struggling business with even fewer options.”
When the guarantee becomes personal
Howell points to two recent Jirsch Sutherland matters that illustrate how quickly a business problem can become a personal one.
In one case, a dessert manufacturer sought restructuring assistance with about $200,000 owed to unsecured creditors, roughly 75 per cent of it to two short-term lenders. Both loans carried personal guarantees from the director, meaning neither a Small Business Restructuring nor liquidation would resolve his personal exposure. He is now taking steps to sell his home to meet the liabilities.
In another, a transport business facing rising costs and a driver shortage borrowed about $75,000 from a short-term lender to manage cash flow, with the director personally guaranteeing the loan. Following the company’s liquidation, the director entered personal bankruptcy. The lender had lodged a caveat over his property immediately after the liquidation, despite not being the largest creditor, and his trustee is now moving to realise the home.
“Liquidation doesn’t make a valid personal guarantee disappear,” Howell said. “The company may have failed, but the lender can turn its attention directly to the guarantor. That can be a huge shock for an owner who assumed their personal assets were protected.”
Timing is everything
Howell is careful to note that short-term finance itself isn’t the problem. “Short-term finance can be the right tool for a viable business facing a genuine, temporary cash flow gap,” he said. “The concern is when a business takes on expensive additional debt to meet existing obligations before seeking restructuring advice. That can make a Small Business Restructuring considerably harder or no longer viable.”
He says the core issue is sequencing, borrowing before understanding the alternatives, rather than borrowing itself. “A personal guarantee blurs the line between the company’s finances and the owner’s,” Howell said. “What starts as a business cash flow issue can quickly escalate into a serious personal financial crisis.”
His advice to owners under pressure is to get advice early, before signing anything. “Seeking advice from a restructuring specialist doesn’t automatically mean putting your company into insolvency, it means understanding all available pathways before taking on debt that could narrow your choices,” he said. “Get advice before you borrow and before you sign a personal guarantee.”