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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 Minnesota, 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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Minnesota Requirements for Personal Guarantee

  • Statute of Frauds (Minn. Stat. § 513.01)

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

  • Plain Language Contract Act (Minn. Stat. § 325G.31)

    Consumer contracts in Minnesota, which may include personal guarantees, must be written in clear and coherent language using words with common everyday meanings.

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

    Prohibits discrimination against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, or because they receive public assistance.

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

    Requires lenders to provide clear disclosure of loan terms and costs to borrowers, which may apply when personal guarantees are part of consumer credit transactions.

  • Consideration Requirement (Minnesota common law)

    Under Minnesota contract law, a personal guarantee must be supported by adequate consideration to be enforceable.

  • Fraudulent Transfer Restrictions (Minn. Stat. § 513.41 et seq. (Uniform Fraudulent Transfer Act))

    Prohibits transferring assets to avoid creditor claims, which is particularly relevant for guarantors attempting to shield assets from collection.

  • Homestead Exemption (Minn. Stat. § 510.01 et seq.)

    Minnesota law protects a portion of a guarantor's homestead from creditors, which may limit recovery under a personal guarantee.

  • Spousal Consent Requirements (Minn. Stat. § 507.02)

    In Minnesota, both spouses may need to sign a personal guarantee if jointly owned property or homestead property could be affected.

  • Bankruptcy Code Implications (11 U.S.C. § 101 et seq.)

    Federal bankruptcy laws may affect the enforceability of personal guarantees and provide certain protections to guarantors in bankruptcy proceedings.

  • Usury Laws (Minn. Stat. § 334.01 et seq.)

    Minnesota's usury laws limit the maximum interest rate that can be charged on loans, which may affect the terms of the underlying debt being guaranteed.

  • Confession of Judgment Prohibition (Minn. Stat. § 548.22)

    Minnesota generally prohibits confession of judgment clauses in consumer contracts, which could include personal guarantees in certain contexts.

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

    Regulates how debt collectors may pursue collection of debts, including those arising from personal guarantees.

  • Uniform Commercial Code - Guaranty Provisions (Minn. Stat. § 336.1-101 et seq.)

    Minnesota's adoption of the UCC includes provisions relevant to guaranties, particularly in commercial transactions.

  • Statute of Limitations on Written Contracts (Minn. Stat. § 541.05)

    In Minnesota, actions on written contracts, including personal guarantees, must be commenced within six years after the cause of action accrues.

  • Consumer Credit Protection (Consumer Credit Protection Act, 15 U.S.C. § 1601 et seq.)

    Federal laws protecting consumers in credit transactions may apply to personal guarantees in certain contexts.

  • Electronic Signatures Validity (Electronic Signatures in Global and National Commerce Act, 15 U.S.C. § 7001; Minn. Stat. § 325L.01 et seq. (Uniform Electronic Transactions Act))

    Under both federal and Minnesota law, electronic signatures may be valid for personal guarantees, subject to certain requirements.

  • Unconscionability Doctrine (Minnesota common law)

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

  • Continuing Guaranty Requirements (Minnesota common law)

    For continuing guaranties that cover future transactions, Minnesota law requires clear language establishing the ongoing nature of the obligation.

  • Suretyship Defenses (Minnesota common law)

    Minnesota recognizes various suretyship defenses that may be available to guarantors, such as material alteration of the underlying obligation.

  • Financial Institutions Regulatory Requirements (12 C.F.R. § 1002.7(d) (Regulation B))

    Federal banking regulations may impose additional requirements on personal guarantees obtained by financial institutions.

Frequently Asked Questions