Glossary
Joint and several liability
Where several people guarantee a debt and each one is liable for the entire amount — not a proportional share. The lender may pursue whichever guarantor is easiest to collect from, for the whole balance.
Joint and several liability: Where several people guarantee a debt and each one is liable for the entire amount — not a proportional share. The lender may pursue whichever guarantor is easiest to collect from, for the whole balance.
Why it matters
Three partners each owning a third of a business, all signing a joint and several guarantee on a $600,000 loan, are each liable for $600,000 — not $200,000.
If the business fails and two partners have no assets, the lender collects the entire balance from the third. That partner's recourse is to sue the others, which is a separate, slow, expensive matter against people who, by definition, have no money.
Where you will meet it
The default wherever more than one person guarantees. SBA loans require a guarantee from every 20%-or-more owner, and those guarantees are typically joint and several.
Lenders prefer it for the obvious reason: one solvent guarantor is easier than several partial recoveries. It is not unreasonable from their side — it is simply much worse for you than most co-guarantors realize.
What you can actually do
- Ask for several liability only, each capped at ownership share. Frequently refused, occasionally granted, always worth asking.
- Ask for a cap on each guarantee even if it stays joint.
- Sign a contribution agreement between the partners. This does not bind the lender, but it establishes in advance what each partner owes the others if one pays more than their share — and it is far easier to agree now than in a crisis.
- Check whether a departing partner is released. Selling your stake does not automatically end your guarantee, and former owners have been pursued for debts of businesses they left years earlier.