Commercial loans & personal guarantees
Investor · Hopedale, MA · Member since 2021 · 321 posts · 213 votes
Commercial loans & personal guarantees
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votesIf there were a default, yes, the lender would foreclose and take the property back. If that doesn't cover the principal balance plus all accrued interest, exit fees, yield maintenance, prepayment penalties, default interest, advances made for unpaid property taxes and insurance (even forced placed insurance), advances on senior loans, foreclosure costs/fees, toxic waste cleanup, costs of resale, the list goes on and on...the lender can sue each and every one of you for the entire unpaid amount.
The way this would likely play out, should the lender elect to enforce the personal guarantee, is they would file suit naming each partner as a defendant. When you lose that lawsuit, the court will issue a judgment against each and every partner for the full amount of the damages (which can also include court costs and post-judgment interest and depending on the terms of your loan agreement, maybe even the lender's attorney's fees for the suit). Then it's up to you partners to figure that out. Maybe the five of you all agree to cut a check for your 20% share.
Or, if that doesn't happen, the first one of you to sell a house will have the proceeds of that sale yanked from you by the court before you even touch them, even if it's ten years later. Or your bank account could be seized. If that pays the entire judgment, now it's up to that partner to sue the other partners to recover the share of the judgment that they should have been responsible for under the terms of the operating agreement.
Forget about the lender chasing you each for 20% because that's what your operating agreement says. The lender isn't bound by your operating agreement, they are bound by the loan agreement, which will most certainly say that you each are jointly and severally liable (which means that each of you and all of you are responsible for the whole deficiency--basically whoever they can get to first, or whoever has the most assets for them to seize).
This is why a wealthy person wouldn't want to sign a PG with a broke partner(s). The wealthy person would always lose, because the broke partner couldn't pay their share, and the lender will focus their energy on collecting from the person they can most likely collect from.
I've talked to many people over the years with stories of great partnerships at the start, that ultimately failed and one or more partners disappeared after things went south. Be careful. Or better yet, seek out a non-recourse loan if you can find one.
18 Replies
- 2yStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
First of all, why would you each be admitted as disregarded entities and not individually? Seems like an unecessary added expense, particularly as single member LLC's. If the borrowing entity were to default on the loan, the lender will hold each responsible. When you each sign as co-guarantors you are signing jointly and severally, not for only 20% of the loan amount.
- Investor · Hopedale, MA · Member since 2021 · 321 posts · 213 votes2y
@Stuart Udis Not saying this is the most effective setup lol, this is the just example we're working with. This doesn't really answer the question though. How would that play out? First of all, I'd think they would just take the property back so long as the value was equal to or greater than the loan amount..
- 2yStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
In your example if value is not sufficient, they will hold you each accountable and if your four partners disappear, the bank can still hold you personally responsible for the entire deficit. Also, what happens if you fail to maintain proper insurance coverage and their is a total loss due to a fire? Now the land is not worth nearly as much as the collateral the bank issued their loan on. Bank will come after you for the repayment of their loan. Same would apply in that scenario....if your partners disapperared the bank can still hold you personally responsible for the entire loan repayment.
- Member since 2024 · 3 posts · 0 votes2y
In this scenario, the personal guarantee serves as assurance to the lender in case of default by the LLC. Typically, lenders will pursue personal guarantees when the LLC is unable to fulfill its obligations, such as missed payments or defaulting on the loan. If the guarantee is enforced, each individual with a 20% ownership stake would be liable for 20% of the outstanding debt. This means they could be pursued for repayment or potentially face legal action to recover the lender's losses. It's crucial for all partners to understand the implications of personal guarantees before committing to them.
- Investor · Hopedale, MA · Member since 2021 · 321 posts · 213 votes2y
Quote from @Tina Williams:
In this scenario, the personal guarantee serves as assurance to the lender in case of default by the LLC. Typically, lenders will pursue personal guarantees when the LLC is unable to fulfill its obligations, such as missed payments or defaulting on the loan. If the guarantee is enforced, each individual with a 20% ownership stake would be liable for 20% of the outstanding debt. This means they could be pursued for repayment or potentially face legal action to recover the lender's losses. It's crucial for all partners to understand the implications of personal guarantees before committing to them.
They wouldn't just take possession of the property so long as it was worth at least the amount of the debt? @Tina Williams
- 2yStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
@Tina Williams The lender would not agree to a loan where each borrower is only responsible for 20% of the loan. The guarantee will be applied joint and severally amongst all guarantors.
- Investor · Hopedale, MA · Member since 2021 · 321 posts · 213 votes2y
@Stuart Udis & Stuart if it's what you're saying, where each person would be responsible for 100% of the debt, again, how would that play out? That's what we're debating
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
@Jessie Dillon
It would play out based on your operating agreement. While each of you is responsible for the debt your operating agreement could outline who is or is not responsible or how much
If there was a default then the lender would still get paid but other members may have to pony up the cash and then sue the partner(s) who did not follow the operating agreement
7e investments53 Reviews - 2yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
If there were a default, yes, the lender would foreclose and take the property back. If that doesn't cover the principal balance plus all accrued interest, exit fees, yield maintenance, prepayment penalties, default interest, advances made for unpaid property taxes and insurance (even forced placed insurance), advances on senior loans, foreclosure costs/fees, toxic waste cleanup, costs of resale, the list goes on and on...the lender can sue each and every one of you for the entire unpaid amount.
The way this would likely play out, should the lender elect to enforce the personal guarantee, is they would file suit naming each partner as a defendant. When you lose that lawsuit, the court will issue a judgment against each and every partner for the full amount of the damages (which can also include court costs and post-judgment interest and depending on the terms of your loan agreement, maybe even the lender's attorney's fees for the suit). Then it's up to you partners to figure that out. Maybe the five of you all agree to cut a check for your 20% share.
Or, if that doesn't happen, the first one of you to sell a house will have the proceeds of that sale yanked from you by the court before you even touch them, even if it's ten years later. Or your bank account could be seized. If that pays the entire judgment, now it's up to that partner to sue the other partners to recover the share of the judgment that they should have been responsible for under the terms of the operating agreement.
Forget about the lender chasing you each for 20% because that's what your operating agreement says. The lender isn't bound by your operating agreement, they are bound by the loan agreement, which will most certainly say that you each are jointly and severally liable (which means that each of you and all of you are responsible for the whole deficiency--basically whoever they can get to first, or whoever has the most assets for them to seize).
This is why a wealthy person wouldn't want to sign a PG with a broke partner(s). The wealthy person would always lose, because the broke partner couldn't pay their share, and the lender will focus their energy on collecting from the person they can most likely collect from.
I've talked to many people over the years with stories of great partnerships at the start, that ultimately failed and one or more partners disappeared after things went south. Be careful. Or better yet, seek out a non-recourse loan if you can find one.
- 2yJoshua GorskyPro MemberProfessional · Freehold, NJ · Member since 2016 · 33 posts · 16 votes
For what it's worth, while a joint and several guaranty is most common, I've seen and have been a part of transactions where the parties negotiated limited guaranties for each guarantor (usually based on their % ownership) adding up to the 100%. It is rare, but the concept exists.
- 2yStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
@Joshua Gorsky That's very interesting. Seen partial recourse, but still joint and severally liabile amongst guarantors. Trying to understand the mechanics of what you shared. For illustration purposes, there is a $1M loan, the lender takes back the asset for $800k & there are 3 guarantors, each with 33% ownership interest in the real estate. The lender can only go after each for $66,000 + misc. fees?
- 2yJoshua GorskyPro MemberProfessional · Freehold, NJ · Member since 2016 · 33 posts · 16 votes
@Stuart Udis
In your hypothetical, yes. The lender will define “Obligations” and make each guarantor responsible for X% of the Obligations.
- 2yRonald RohdePro MemberAttorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
Quote from @Stuart Udis:
@Joshua Gorsky That's very interesting. Seen partial recourse, but still joint and severally liabile amongst guarantors. Trying to understand the mechanics of what you shared. For illustration purposes, there is a $1M loan, the lender takes back the asset for $800k & there are 3 guarantors, each with 33% ownership interest in the real estate. The lender can only go after each for $66,000 + misc. fees?
Usually that won't happen though, one partner will pay the $200k and seek recourse from the other partners later.
- Member since 2026 · 15 posts · 3 votes2mo
I know this is an older thread, but adding this for anyone researching the same scenario now.
In almost all commercial loans, personal guarantees are "joint and several." This means the lender absolutely does not care about your 20% ownership split. If the loan defaults, the bank won't try to collect 20% from each of the five partners. They will simply go after the partner who has the deepest pockets and most liquid assets to recover 100% of the money.
I actually went through a similar partnership structure on a deal, and the legal jargon was incredibly confusing. We ended up getting advice from Director First to map out our actual liability exposure. It completely changed our perspective because it turned out the partner with the highest net worth was carrying almost all the real risk, despite having an equal share on paper. - Lender · Phoenix, AZ · Member since 2026 · 55 posts · 17 votes2mo
Brian's answer on joint-and-several is exactly right — I'll just add the lender's-eye view of the guarantee itself, because it's not always all-or-nothing and a few pieces are negotiable:
Recourse vs. non-recourse. Most small-balance commercial is full recourse, with PGs from anyone owning roughly 20%+ — that's standard, not a red flag. True non-recourse mostly shows up on larger agency/CMBS deals and usually costs you in rate and leverage. On a deal this size, expect the PG; the real question is how it's written, not whether it exists.
What actually triggers it. Ask whether it's a full payment guarantee or a carve-out / "springing" guarantee. On some deals you can negotiate a PG that only fires on fraud, misappropriation of rents, or an unauthorized transfer — not on an ordinary market default. That's a very different risk profile from guaranteeing every dollar of the note.
Several vs. joint-and-several. To Brian's point, joint-and-several is what lets the lender pursue the deepest pocket. With five equal partners you can occasionally negotiate several liability capped at each partner's pro-rata share — lenders resist it because it weakens collection, but it's worth asking; the worst they say is no.
Reserves as a lever. Sometimes a lender will soften the guarantee if the LLC posts stronger reserves up front. If the group has the cash, that can be a trade worth offering.
Net: the PG is normal on a deal this size, but "how is it written" and "what triggers it" are negotiable, and those matter more to each partner's real exposure than the ownership split does.
- 2moAli NajjarBusiness MemberLender · NJ · Member since 2025 · 66 posts · 28 votes
I’d expect the lender to look at the ownership structure of the borrowing entity, each partner’s ownership percentage, and the strength of the individual guarantors.
With five partners at 20% each, I’d also ask whether the lender requires guarantees from everyone or only from partners above a certain ownership threshold. That can vary quite a bit by lender and loan structure.
Quicker Home Loans526 Reviews - Investor · Pacific Northwest · Member since 2026 · 538 posts · 313 votes2mo
The thing I’d separate here is ownership from liability.
Five people owning 20% each tells you how the equity in the LLC is divided. It does not automatically mean each person only has 20% exposure on the loan guarantee.
If all five partners sign a full, unconditional, joint-and-several personal guaranty, the lender may be able to pursue one guarantor for far more than 20%, potentially the entire guaranteed amount, depending on the loan documents.
So the real question isn’t “we each own 20%, what happens?”
It’s:
What exactly is each person guaranteeing?
Is the guaranty full recourse or limited recourse?
Joint and several, or capped individually?
Does it burn off after a certain LTV, DSCR, or seasoning period?
Can the lender pursue guarantors immediately after default, or must it first exhaust the collateral?
What events trigger recourse besides missed payments?
Are there separate bad-boy carveouts for fraud, misapplication of rents, unauthorized transfers, bankruptcy, waste, environmental issues, etc.?
I’d also look very closely at the operating agreement between the five partners.
If the lender collects $500,000 from one partner because that person has the strongest balance sheet, what happens between the partners afterward?
That internal contribution question is separate from what the lender was legally entitled to collect.
So I’d model the downside as:
Property fails → borrower defaults → collateral recovery → remaining lender exposure → guaranty enforcement → allocation among partners.
The mistake would be assuming the last step is automatically 20/20/20/20/20 just because the ownership was.
- 2wNicholas FloydBusiness MemberNY · Member since 2026 · 324 posts · 104 votes
Jessie, great question. I work in business funding, and this is something more investors should understand before signing on a commercial loan.
One thing to remember is that having an LLC doesn't automatically protect you from personal liability if you've signed a personal guarantee. Even if all 5 partners own 20% each, that doesn't necessarily mean each person is only responsible for 20% of the debt. Depending on how the guarantees are written, a lender could potentially hold one partner responsible for the entire outstanding balance if the loan defaults.
Another thing worth mentioning is business age. I work with business owners who need substantial funding but sometimes run into problems because their LLC hasn't been established long enough to meet certain lenders' requirements.
I also have access to shelf corporations, which are existing companies that already have age on them. For someone seeking a larger amount of funding, acquiring an established entity could be worth exploring if their current LLC doesn't meet a lender's minimum age requirement. However, lenders may still evaluate the actual operating history, ownership changes, revenue, and credit profile, so an aged corporation alone doesn't guarantee eligibility or approval.
Depending on the funding amount and program, a strong personal credit profile may also open up additional financing options.
I’m curious, are you putting together a commercial deal with multiple partners right now, or are you exploring the best way to structure one before moving forward?
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