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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 Mississippi, 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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Mississippi Requirements for Personal Guarantee

  • Statute of Frauds (Mississippi Code § 15-3-1)

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

  • Consideration Requirement (Mississippi common law of contracts)

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

  • Clear and Unambiguous Language (Mississippi case law - Edgewater Mult-L.P. v. Monnin)

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

  • 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 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.

  • Usury Limitations (Mississippi Code § 75-17-1)

    The interest rate on the guaranteed debt must not exceed Mississippi's maximum legal interest rate limits.

  • Fraudulent Transfer Provisions (Mississippi Code § 15-3-101 et seq.)

    The guarantee must acknowledge that transfers of assets to avoid guarantee obligations may be voided under Mississippi's Uniform Fraudulent Transfer Act.

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

    The guarantee should address that personal guarantee obligations may survive bankruptcy proceedings under certain circumstances.

  • Waiver of Homestead Exemption (Mississippi Code § 85-3-21)

    For the guarantee to reach homestead property, it must include a specific waiver of Mississippi's homestead exemption protections.

  • Spousal Consent Requirements (Mississippi Code § 93-3-1)

    If the guarantor is married and the guarantee could affect marital property, spousal consent may be required under Mississippi law.

  • Limitation of Actions (Mississippi Code § 15-1-49)

    The guarantee should acknowledge Mississippi's statute of limitations for actions on written contracts, which is three years.

  • Choice of Law Provision (Mississippi common law on choice of law)

    The guarantee should specify that Mississippi law governs the agreement if the parties intend Mississippi law to apply.

  • Forum Selection Clause (Mississippi Rules of Civil Procedure)

    The guarantee may specify the Mississippi court venue where any disputes will be litigated.

  • Confession of Judgment Prohibition (Mississippi common law and public policy)

    The guarantee must not include confession of judgment provisions, which are generally unenforceable in Mississippi.

  • Continuing Guarantee Provisions (Mississippi common law on guarantees)

    If intended as a continuing guarantee, the document must clearly state this intention and the scope of future obligations covered.

  • Revocation Terms (Mississippi common law on guarantees)

    The guarantee should specify conditions under which the guarantor may revoke the guarantee for future transactions.

  • Notice Requirements (Mississippi common law on guarantees)

    The guarantee should address whether the guarantor is entitled to notice of the borrower's default and the timeframe for such notice.

  • Suretyship Defenses Waiver (Mississippi common law on suretyship)

    The guarantee should address whether traditional suretyship defenses are waived, such as extensions of time or modifications to the underlying obligation.

  • Joint and Several Liability (Mississippi Code § 85-5-1)

    If multiple guarantors exist, the guarantee should specify whether liability is joint and several under Mississippi law.

  • Attorney's Fees Provision (Mississippi common law on contracts)

    The guarantee may include provisions for recovery of reasonable attorney's fees in the event of enforcement, which are generally enforceable in Mississippi.

Frequently Asked Questions