2. What else is necessary to know about guaranties?

Additional terminology is used to distinguish guaranties:

  • Joint and several, and several guaranties. "Joint and several" guaranties mean that if one of your partners who is also guarantying the business debt along with you cannot come up with their share of their payback to the lender at a time when the lender requires it to be paid back (that is after your business has failed), then you are liable for the entire amount even though you may own, for example, only 50% of the business.

    "Several" guaranties are much more appealing in that you are liable only for your pro rata share ownership interest of the business and that's it. If you own 50%, you are required to pay only your 50% of the debt obligation if the business fails. Your partner is responsible for their 50% and if they do not have the funds available at the time it is requested by the lender, that is not a problem that you are legally required to solve.
  • Limited guaranties. It is also true that guaranties can sometimes be limited to a certain portion of the amount being borrowed. Some lenders require only a guaranty for that portion of the debt to be incurred that is not a hard asset (equipment). For example, if you borrow $300,000 for renovating the space you are going to house your business in and another $1 million for the equipment, some lenders will require guaranties only on the $300,000 and if they also offer it on a several basis, then, if you own 50%, you are guarantying only $150,000. That is a far cry from potentially being personally liable for $1.3 million if the guaranty was for 100% of the amount borrowed and on a joint and several basis.
  • Collateralized guaranties. There are very real differences between "collateralized" guaranties and "noncollateralized" guaranties. Collateralized guaranties mean that you secure your guaranty with another asset that you ownperhaps it is a home, a second home, a brokerage trading account, or another business that is owned. It is likely to be substantive and, in the event of a business failure, the lender can sell the house and get the proceeds or cash in the brokerage account in an effort to satisfy the guaranty that was provided in support of the borrowing for the new business. Most borrowers obviously want to try to avoid that, but it is not always possible. Noncollateralized loans do not relieve total liability by any means, but it does make it harder for the lender to force the borrower to pay obligated amounts in the event of a business failure, assuming the borrower is not prepared to stand up to their obligation in the first placeand I would certainly not recommend that.

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