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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 Maine, 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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Maine Requirements for Personal Guarantee

  • Statute of Frauds (Maine Revised Statutes Title 33, §51)

    Personal guarantees must be in writing and signed by the guarantor to be enforceable, as required by Maine's adoption of the Statute of Frauds.

  • Clear and Conspicuous Terms (Maine Consumer Credit Code, Title 9-A)

    The guarantee must clearly state the obligations being guaranteed and the extent of the guarantor's liability in plain language that is conspicuously presented.

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

    Lenders cannot require a spouse's signature on a personal guarantee unless the spouse is a business partner or the applicant is relying on the spouse's income or assets.

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

    For consumer guarantees, clear disclosure of terms, costs, and APR must be provided to the guarantor.

  • Maine Fair Debt Collection Practices (Maine Revised Statutes Title 32, Chapter 109-A)

    Defines how creditors may collect on defaulted personal guarantees, prohibiting harassment, false statements, and unfair practices.

  • Consideration Requirement (Maine common law of contracts)

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

  • Fraudulent Transfer Limitations (Maine Uniform Fraudulent Transfer Act, Title 14, §3571-3582)

    Prohibits guarantors from transferring assets to avoid guarantee obligations, with lookback periods for such transfers.

  • Bankruptcy Code Implications (11 U.S.C. §523(a)(2))

    Addresses the treatment of personal guarantees in bankruptcy proceedings, including potential discharge limitations.

  • Maine Consumer Solicitation Sales Act (Maine Revised Statutes Title 32, §4661-4670)

    If the guarantee relates to a consumer transaction, it must comply with Maine's requirements for consumer contracts.

  • Uniform Commercial Code - Guaranty Provisions (Maine Revised Statutes Title 11, Article 3-416 and Article 9)

    Governs commercial guarantees related to the sale of goods or secured transactions in Maine.

  • Statute of Limitations (Maine Revised Statutes Title 14, §752)

    Legal actions on written contracts, including personal guarantees, must be commenced within 6 years in Maine.

  • Maine Unfair Trade Practices Act (Maine Revised Statutes Title 5, §205-A to §214)

    Prohibits unfair or deceptive practices in obtaining personal guarantees from Maine residents.

  • Waiver of Homestead Exemption (Maine Revised Statutes Title 14, §4422)

    Any waiver of Maine's homestead exemption in a personal guarantee must be explicit, knowing, and voluntary.

  • Choice of Law Provisions (Maine common law on conflict of laws)

    Maine courts may not enforce choice of law provisions that attempt to circumvent Maine consumer protection laws.

  • Electronic Signatures (Maine Revised Statutes Title 10, Chapter 1051)

    Personal guarantees may be executed with electronic signatures under Maine's adoption of the UETA.

  • Regulation Z Requirements (12 CFR Part 1026)

    Implements Truth in Lending Act requirements for consumer credit transactions that may involve personal guarantees.

  • Maine Interest and Usury Limitations (Maine Revised Statutes Title 9-A, §2-401)

    Caps on interest rates and fees that may apply to obligations secured by personal guarantees.

  • Unconscionability Doctrine (Maine common law and Maine Revised Statutes Title 11, §2-302)

    Maine courts may refuse to enforce personal guarantee terms that are unconscionable or grossly unfair.

  • Federal Trade Commission Act (15 U.S.C. §45)

    Prohibits unfair or deceptive acts or practices in commerce, including in the context of obtaining personal guarantees.

  • Maine Uniform Commercial Code - Good Faith Obligation (Maine Revised Statutes Title 11, §1-304)

    Imposes a duty of good faith and fair dealing in the enforcement of personal guarantees related to commercial transactions.

Frequently Asked Questions