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Personal Guarantees for Small Business Loans: What Every Business Owner Should Know

Learn what a personal guarantee means for your small business loan, how it affects your personal assets, and what options you have as a minority, women, or first-time business owner.

Introduction

A personal guarantee is a legally binding promise that makes you personally responsible for repaying a business loan if your business cannot. When you sign a personal guarantee, you're essentially putting your personal assets—such as your home, car, or savings—on the line to secure financing for your business. This is particularly common for small business owners, startups, and businesses without substantial assets or credit history. Understanding the implications of a personal guarantee is crucial before signing any business loan agreement, as it removes the liability protection that business structures like LLCs or corporations typically provide.

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Key Things to Know

  1. 1

    Personal guarantees effectively pierce the corporate veil, meaning your personal assets are at risk despite having a formal business structure like an LLC or corporation.

  2. 2

    Most small business loans, including SBA loans, require personal guarantees from all owners with 20% or greater ownership in the business.

  3. 3

    Your spouse's assets may also be at risk in community property states unless they sign a spousal consent waiver (where available).

  4. 4

    Consider forming a separate property agreement or trust to protect certain assets before signing a personal guarantee.

  5. 5

    Having business insurance, particularly business interruption insurance, can help mitigate risks that might lead to loan default.

  6. 6

    Keep business and personal finances strictly separate to strengthen your position if you ever need to negotiate with lenders.

  7. 7

    Work with a business attorney to review any personal guarantee before signing, as terms can vary significantly between lenders.

  8. 8

    Building strong business credit can eventually help you qualify for financing with less stringent personal guarantee requirements.

Key decisions before you file

Before you file a Personal Guarantee in Delaware, a few decisions shape the document: which option to choose and what each one means. The Personal Guarantee guide walks through them.

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Delaware Requirements for Personal Guarantee

  • Statute of Frauds (6 Del. C. § 2714)

    Personal guarantees must be in writing and signed by the guarantor to be enforceable under Delaware's Statute of Frauds, as they constitute a promise to answer for the debt of another.

  • Consideration Requirement (Delaware Common Law)

    The personal guarantee must be supported by adequate consideration to be legally binding under Delaware contract law.

  • Capacity to Contract (Delaware Common Law)

    The guarantor must have legal capacity to enter into the guarantee agreement under Delaware law, including being of legal age and sound mind.

  • Equal Credit Opportunity Act Compliance (15 U.S.C. § 1691)

    Lenders cannot automatically require spouses to guarantee loans unless the spouse is a business partner or the borrower is relying on the spouse's income to qualify for the loan.

  • Truth in Lending Act Disclosures (15 U.S.C. § 1601 et seq.)

    For consumer guarantees, proper disclosures regarding terms, interest rates, and fees must be provided to the guarantor.

  • Fraudulent Transfer Limitations (6 Del. C. § 1301-1312)

    Personal guarantees may be voided if they constitute fraudulent transfers under Delaware's Uniform Fraudulent Transfer Act.

  • Suretyship Defenses (Delaware Common Law)

    Delaware law recognizes certain suretyship defenses that may be available to guarantors unless explicitly waived in the guarantee agreement.

  • Statute of Limitations (10 Del. C. § 8106)

    Actions to enforce written guarantees in Delaware must be brought within 3 years from the date of default.

  • Choice of Law Provisions (Delaware Common Law)

    Delaware generally enforces choice of law provisions in contracts, including personal guarantees, provided they do not violate public policy.

  • Bankruptcy Implications (11 U.S.C. § 524)

    Personal guarantees remain enforceable despite business bankruptcy, but may be dischargeable in personal bankruptcy proceedings.

  • Usury Laws (6 Del. C. § 2301)

    Delaware has relatively permissive usury laws, but guarantees supporting loans with excessive interest rates may still be subject to challenge.

  • Unconscionability Doctrine (Delaware Common Law)

    Personal guarantees may be unenforceable if their terms are deemed unconscionable under Delaware contract law.

  • Uniform Commercial Code Provisions (6 Del. C. Article 9)

    For guarantees related to commercial transactions, Delaware's UCC provisions may apply, particularly regarding notices and commercial reasonableness.

  • Spousal Consent Requirements (Delaware Common Law)

    While Delaware is not a community property state, spousal consent may be required if jointly owned property is pledged as collateral in a personal guarantee.

  • Continuing Guarantee Provisions (Delaware Common Law)

    Delaware law recognizes continuing guarantees that cover multiple transactions, but requires clear language establishing the continuing nature of the obligation.

  • Revocation Rights (Delaware Common Law)

    Under Delaware law, guarantors may have the right to revoke continuing guarantees for future transactions, unless explicitly waived.

  • Disclosure Requirements (Delaware Common Law)

    Material changes to the underlying obligation may require disclosure to the guarantor to maintain enforceability of the guarantee.

  • Electronic Signatures (6 Del. C. § 12A-101 et seq.)

    Delaware recognizes electronic signatures for personal guarantees under the Uniform Electronic Transactions Act.

  • Consumer Protection Laws (6 Del. C. § 2511-2527)

    Personal guarantees may be subject to Delaware Consumer Fraud Act if obtained through deceptive practices.

  • Remedies and Enforcement (10 Del. C. § 3501 et seq.)

    Delaware law governs the remedies available to creditors seeking to enforce personal guarantees, including attachment of personal assets.

Frequently Asked Questions