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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 Wisconsin, 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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Wisconsin Requirements for Personal Guarantee

  • Statute of Frauds (Wis. Stat. § 241.02)

    Personal guarantees must be in writing to be enforceable under Wisconsin's Statute of Frauds, which requires certain agreements to be evidenced by a written document signed by the party to be charged.

  • Consideration Clause (Wisconsin Common Law of Contracts)

    The personal guarantee must be supported by adequate consideration (something of value exchanged) to be legally binding under Wisconsin contract law.

  • Clear and Unambiguous Language (McFarland State Bank v. Sherry, 2012 WI App 4)

    Wisconsin courts require guarantee agreements to contain clear and unambiguous language regarding the guarantor's obligations and the extent of liability.

  • Marital Property Act Compliance (Wis. Stat. § 766.55)

    Under Wisconsin's Marital Property Act, if the guarantor is married, the spouse's signature may be required for the guarantee to be enforceable against marital property.

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

    Federal law prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, or because an applicant receives public assistance.

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

    For consumer guarantees, federal law requires clear disclosure of credit terms and costs to help consumers compare and understand credit terms.

  • Waiver of Homestead Exemption (Wis. Stat. § 815.20)

    Wisconsin law provides homestead exemption protection, but guarantors may waive this protection in a personal guarantee. The waiver must be explicit and conspicuous.

  • Fraudulent Transfer Provisions (Wis. Stat. § 242.01 et seq.)

    Wisconsin's Uniform Fraudulent Transfer Act prohibits transferring assets to avoid creditor claims, which is relevant when enforcing personal guarantees.

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

    Personal guarantees must acknowledge that obligations may survive bankruptcy proceedings under certain circumstances according to federal bankruptcy law.

  • Continuing Guarantee Provisions (Bank of Sun Prairie v. Opstein, 86 Wis.2d 669)

    Wisconsin law recognizes continuing guarantees that cover multiple transactions over time. The guarantee must clearly state if it is intended to be continuing.

  • Revocation Procedures (Wisconsin Common Law of Guaranty)

    The guarantee should specify procedures for revocation, as Wisconsin law permits guarantors to revoke continuing guarantees for future transactions.

  • Notice Requirements (Wisconsin Common Law of Guaranty)

    Wisconsin law may require creditors to provide notice to guarantors of certain events, such as default by the primary debtor, depending on the terms of the guarantee.

  • Enforcement Limitations (Wis. Stat. § 893.43)

    Wisconsin's statute of limitations for written contracts (including guarantees) is 6 years, which limits the time period for bringing enforcement actions.

  • Attorney's Fees Provisions (Wisconsin Common Law)

    Wisconsin generally follows the American Rule regarding attorney's fees, but a personal guarantee may include provisions for recovery of reasonable attorney's fees in enforcement actions.

  • Choice of Law and Venue (Bush v. National School Studios, Inc., 139 Wis.2d 635)

    Wisconsin courts generally enforce choice of law and venue provisions in guarantees if they bear a reasonable relationship to the transaction.

  • Usury Laws Compliance (Wis. Stat. § 138.05)

    Wisconsin's usury laws limit interest rates that may be charged on certain loans, which may affect the terms of the guaranteed obligation.

  • Consumer Protection Act Compliance (Wis. Stat. § 421.101 et seq.)

    Wisconsin's Consumer Act provides protections for consumer transactions that may apply to certain personal guarantees related to consumer credit.

  • Uniform Commercial Code Provisions (Wis. Stat. § 401.101 et seq.)

    Wisconsin has adopted the UCC, which contains provisions relevant to guarantees, particularly regarding commercial transactions and negotiable instruments.

  • Electronic Signatures Validity (Wis. Stat. § 137.15; 15 U.S.C. § 7001 (E-SIGN Act))

    Under both federal and Wisconsin law, electronic signatures may be valid for personal guarantees if they comply with applicable requirements.

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

    Federal law regulates how debts, including those arising from personal guarantees, may be collected, prohibiting abusive, deceptive, and unfair debt collection practices.

Frequently Asked Questions