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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 North Dakota, 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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North Dakota Requirements for Personal Guarantee

  • Statute of Frauds (N.D. Cent. Code § 9-06-04)

    Personal guarantees must be in writing to be enforceable under North Dakota's Statute of Frauds, especially when the guarantee is a promise to answer for the debt of another.

  • Consideration Clause (N.D. Cent. Code § 9-05-01)

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

  • Capacity to Contract (N.D. Cent. Code § 9-02-01)

    The guarantor must have legal capacity to enter into the guarantee agreement, including being of legal age and sound mind.

  • Clear and Unambiguous Language (N.D. Cent. Code § 9-07-02)

    The guarantee must be written in clear and unambiguous language to be enforceable under North Dakota law.

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

    The personal guarantee must comply with the ECOA, which prohibits discrimination on the basis of race, color, religion, national origin, sex, marital status, or age in credit transactions.

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

    If applicable to the underlying loan, the personal guarantee should reference compliance with TILA disclosure requirements.

  • Spousal Consent (N.D. Cent. Code § 14-07-08)

    In North Dakota, if the guarantor is married and the guarantee may affect marital property, spousal consent may be required.

  • Fraudulent Transfer Avoidance (N.D. Cent. Code § 13-02.1)

    The guarantee must acknowledge North Dakota's Uniform Fraudulent Transfer Act, which prevents debtors from transferring assets to avoid creditor claims.

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

    The guarantee should address the implications of bankruptcy filing by either the primary debtor or guarantor under federal bankruptcy law.

  • Waiver of Homestead Exemption (N.D. Cent. Code § 47-18-01)

    North Dakota allows certain homestead exemptions in collections; the guarantee should address whether the guarantor waives these protections.

  • Governing Law (N.D. Cent. Code § 9-07-11)

    The guarantee should specify that North Dakota law governs the agreement, particularly important for interstate transactions.

  • Venue Selection (N.D. Cent. Code § 28-04-01)

    The guarantee should specify the venue for any legal proceedings related to enforcement of the guarantee.

  • Continuing Guarantee Provision (N.D. Cent. Code § 22-01-07)

    If intended as a continuing guarantee, the document must clearly state this intention under North Dakota contract interpretation principles.

  • Revocation Terms (N.D. Cent. Code § 22-01-06)

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

  • Notice Requirements (N.D. Cent. Code § 22-01-10)

    The guarantee should address notice requirements for default, demand for payment, and other significant events.

  • Limitation of Actions (N.D. Cent. Code § 28-01-16)

    The guarantee should acknowledge North Dakota's statute of limitations for bringing actions on written contracts, which is six years.

  • Severability Clause (N.D. Cent. Code § 9-04-04)

    The guarantee should include a severability clause to ensure that if any provision is found unenforceable, the remainder of the agreement remains valid.

  • Usury Compliance (N.D. Cent. Code § 47-14-09)

    The guarantee must acknowledge compliance with North Dakota's usury laws regarding maximum interest rates.

  • Acceleration Clause (N.D. Cent. Code § 41-03-18)

    The guarantee should address whether the creditor has the right to accelerate the entire debt upon default.

  • Attorney's Fees Provision (N.D. Cent. Code § 28-26-01)

    The guarantee should specify whether the guarantor will be responsible for attorney's fees in the event of enforcement proceedings.

Frequently Asked Questions