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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 Louisiana, 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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Louisiana Requirements for Personal Guarantee

  • Capacity to Contract (Louisiana Civil Code Article 1918)

    The guarantor must have legal capacity to enter into contracts. Under Louisiana Civil Code Article 1918, a natural person must have capacity to contract, which is presumed for adults unless proven otherwise.

  • Consent Requirements (Louisiana Civil Code Article 1927)

    The personal guarantee must be given with free and deliberate consent, without duress, error, or fraud as required by Louisiana Civil Code Article 1927.

  • Writing Requirement for Suretyship (Louisiana Civil Code Article 3038)

    In Louisiana, a personal guarantee is considered a suretyship, which must be express and in writing per Louisiana Civil Code Article 3038.

  • Consideration Requirement (Louisiana Civil Code Article 1967)

    Under Louisiana law, a personal guarantee must be supported by consideration, which can be the extension of credit to the primary debtor.

  • Community Property Implications (Louisiana Civil Code Article 2345)

    Louisiana is a community property state, and a personal guarantee may affect community property. Under Louisiana Civil Code Article 2345, obligations incurred by a spouse during marriage may be satisfied from community property.

  • Spousal Consent (Louisiana Civil Code Article 2347)

    In certain cases involving community property, spousal consent may be required for a personal guarantee that encumbers community property.

  • Solidary Liability (Louisiana Civil Code Article 3045)

    In Louisiana, a guarantor may be solidarily (jointly and severally) liable with the principal debtor if expressly stated in the guarantee agreement.

  • Discussion and Division (Louisiana Civil Code Articles 3045-3046)

    Unless waived, a guarantor in Louisiana has the benefit of discussion (requiring the creditor to pursue the principal debtor first) and division (limiting liability to the guarantor's share if multiple guarantors exist).

  • Prescription (Statute of Limitations) (Louisiana Civil Code Article 3499)

    Actions on personal guarantees in Louisiana are subject to a liberative prescription period of 10 years for written contracts.

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

    Federal law prohibits discrimination in credit transactions, including requiring spousal guarantees solely based on marital status.

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

    For consumer guarantees, federal law requires certain disclosures regarding the terms and conditions of the guarantee.

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

    Personal guarantees remain enforceable despite business bankruptcy, but may be dischargeable in personal bankruptcy under federal bankruptcy law.

  • Unfair, Deceptive, or Abusive Acts or Practices (12 U.S.C. § 5531)

    Personal guarantees must not contain terms that would be considered unfair, deceptive, or abusive under federal consumer protection laws.

  • Deficiency Judgment Limitations (Louisiana Code of Civil Procedure Article 2771)

    Louisiana has specific requirements for obtaining deficiency judgments after foreclosure, which may affect the enforcement of personal guarantees related to secured transactions.

  • Revocation of Suretyship (Louisiana Civil Code Article 3057)

    Under Louisiana law, a guarantor may revoke the guarantee for future obligations unless specifically waived in the agreement.

  • Extinction of Suretyship (Louisiana Civil Code Article 3059)

    A personal guarantee in Louisiana may be extinguished by the same causes that extinguish other obligations, including payment, novation, and prescription.

  • Uniform Commercial Code Provisions (Louisiana Revised Statutes 10:1-101 et seq.)

    Louisiana has adopted portions of the UCC that may apply to personal guarantees related to commercial transactions, particularly regarding secured transactions.

  • Fraudulent Transfer Restrictions (Louisiana Civil Code Article 2036 and 11 U.S.C. § 548)

    Federal and Louisiana law prohibit transfers made to avoid creditors, which may affect guarantors attempting to shield assets from guarantee obligations.

  • Consumer Credit Protection (Louisiana Revised Statutes 9:3510 et seq.)

    Louisiana has consumer credit protection laws that may limit the terms and enforcement of personal guarantees for consumer transactions.

  • Notarization Requirements (Louisiana Revised Statutes 35:1 et seq.)

    While not always legally required, notarization of personal guarantees in Louisiana provides additional authentication and may be necessary for certain legal proceedings.

Frequently Asked Questions