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

Open the Personal Guarantee guide

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Indiana Requirements for Personal Guarantee

  • Statute of Frauds (Indiana Code § 32-21-1-1)

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

  • Consideration Requirement (Indiana common law of contracts)

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

  • Clear and Unambiguous Language (Indiana case law - Kruse v. National Bank of Indianapolis, 815 N.E.2d 137 (Ind. Ct. App. 2004))

    The guarantee must contain clear and unambiguous language regarding the guarantor's obligations to be enforceable in Indiana courts.

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

    Creditors cannot require spouses to guarantee loans unless the spouse is a business partner or the applicant 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 interest rates, payment terms, and other credit terms must be provided.

  • Limitation of Actions (Indiana Code § 34-11-2-11)

    Actions on written contracts, including personal guarantees, must be commenced within 10 years in Indiana.

  • Fraudulent Transfer Provisions (Indiana Code § 32-18-2-1 et seq.)

    Transfers made to avoid guarantee obligations may be voided under Indiana's Uniform Fraudulent Transfer Act.

  • Bankruptcy Implications (11 U.S.C. § 523, § 524)

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

  • Waiver of Defenses (Indiana Code § 26-1-3.1-605)

    Indiana law permits guarantors to waive certain defenses, but such waivers must be explicit and conspicuous in the guarantee agreement.

  • Continuing Guarantee Provisions (Indiana common law - Merchants Nat'l Bank & Trust Co. v. Lewark, 503 N.E.2d 415 (Ind. Ct. App. 1987))

    If the guarantee is intended to be continuing, this must be explicitly stated to cover future advances or obligations.

  • Usury Laws (Indiana Code § 24-4.5-3-201)

    Interest rates on guaranteed loans must comply with Indiana's maximum allowable interest rates to avoid usury violations.

  • Confession of Judgment Prohibition (16 C.F.R. § 444.2)

    Confession of judgment clauses in consumer transactions are generally prohibited under federal law.

  • Spousal Consent Requirements (Indiana Code § 32-17-10-2)

    If marital property will be subject to the guarantee, spousal consent may be required under Indiana law.

  • Uniform Commercial Code Provisions (Indiana Code § 26-1-1-101 et seq.)

    Guarantees related to commercial transactions are subject to UCC provisions as adopted in Indiana.

  • Fair Debt Collection Practices Act (15 U.S.C. § 1692 et seq.)

    Collection efforts on personal guarantees must comply with federal debt collection practices.

  • Unconscionability Limitations (Indiana Code § 26-1-2-302)

    Personal guarantee terms that are excessively one-sided may be deemed unconscionable and unenforceable under Indiana law.

  • Notarization Requirements (Indiana Code § 33-42-9-1 et seq.)

    While not strictly required for validity, notarization of personal guarantees is recommended in Indiana to prevent future authentication disputes.

  • Remedies and Enforcement Provisions (Indiana Code § 26-1-1-106)

    The guarantee should clearly specify available remedies upon default, consistent with Indiana law on contract remedies.

  • Attorney's Fees Provisions (Indiana Code § 34-52-1-1)

    Provisions for recovery of attorney's fees in the event of enforcement are generally enforceable in Indiana if explicitly stated.

  • Choice of Law and Venue (Indiana common law - Daimler Chrysler Corp. v. Yaeger, 848 N.E.2d 1074 (Ind. 2006))

    Indiana courts generally enforce choice of law and venue provisions in guarantees if there is a reasonable relationship to the chosen jurisdiction.

Frequently Asked Questions