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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 South 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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South Dakota Requirements for Personal Guarantee

  • Statute of Frauds (SDCL § 53-8-2)

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

  • Consideration Clause (SDCL § 53-1-2)

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

  • Capacity to Contract (SDCL § 53-2-1 to 53-2-3)

    The guarantor must have legal capacity to enter into the guarantee agreement as required by South Dakota law.

  • Clear and Unambiguous Language (SDCL § 53-5-1)

    The guarantee must use clear and unambiguous language to define the scope and extent of the guarantor's liability under South Dakota contract interpretation principles.

  • Truth in Lending Disclosures (15 U.S.C. § 1601 et seq.; Regulation Z (12 CFR Part 226))

    For consumer guarantees, compliance with federal Truth in Lending Act requirements for disclosure of credit terms.

  • Equal Credit Opportunity Act Compliance (15 U.S.C. § 1691 et seq.; Regulation B (12 CFR Part 202))

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

  • Spousal Consent Requirements (SDCL § 25-2-7)

    South Dakota law regarding when a spouse's signature may be required on a personal guarantee, particularly for marital property considerations.

  • Limitation of Actions (SDCL § 15-2-13)

    The statute of limitations for enforcing a personal guarantee in South Dakota is six years for written contracts.

  • Usury Laws (SDCL § 54-3-1.1)

    Compliance with South Dakota's usury laws which limit interest rates that can be charged on loans.

  • Fraudulent Transfer Provisions (SDCL § 54-8A-1 et seq.)

    Compliance with South Dakota's Uniform Fraudulent Transfer Act which prevents guarantors from transferring assets to avoid creditors.

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

    Recognition that personal guarantees may be affected by federal bankruptcy laws if the guarantor files for bankruptcy protection.

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

    Compliance with federal regulations on debt collection practices when enforcing a personal guarantee.

  • Waiver of Defenses (SDCL § 53-9-3 to 53-9-5)

    South Dakota law regarding the validity of clauses where guarantors waive certain defenses or rights.

  • Continuing Guarantee Provisions (SDCL § 56-1-16)

    Clear specification of whether the guarantee is continuing (covering future transactions) or limited to specific obligations under South Dakota contract law.

  • Notice Requirements (SDCL § 56-1-22)

    Compliance with any notice requirements to guarantors under South Dakota law, particularly regarding default or modification of the underlying obligation.

  • Revocation Provisions (SDCL § 56-1-13)

    Clear terms regarding if and how the guarantor may revoke the guarantee for future transactions under South Dakota law.

  • Choice of Law and Venue (SDCL § 53-1-4)

    Specification of governing law and venue for disputes, which must comply with South Dakota's rules on choice of law provisions.

  • Severability Clause (SDCL § 53-5-3)

    Provision that if any part of the guarantee is found unenforceable, the remainder continues in effect, consistent with South Dakota contract principles.

  • Attorney's Fees Provisions (SDCL § 15-17-38)

    South Dakota law regarding the enforceability of provisions requiring the guarantor to pay the creditor's attorney's fees in the event of default.

  • UCC Security Interest Provisions (SDCL § 57A-9-101 et seq.)

    Compliance with Uniform Commercial Code requirements if the personal guarantee is secured by personal property.

Frequently Asked Questions