Make sure anyone giving a personal guarantee for your business doesn't pay more than their fair share.
You’d think that when several people guarantee a bank loan, lease, or some other obligation the creditor would have to collect the fair share from each person if the company doesn’t pay the obligation. But that’s not how it works.
Even when a few people give a guarantee together, a creditor doesn't have to pick on them all equally.
Shareholders and others connected to the business often need to promise banks, landlords, and other creditors that if the company doesn’t pay the obligation, they will. That’s called a guarantee and the people giving the guarantee are called guarantors.
The guarantee the creditor asks for is almost always “joint and several“. That means the creditor has the option to go after all the guarantors if it wants (joint) or one or more of them individually (several) for the whole amount. So, the creditor doesn’t have to treat the guarantors equally at all. It’s a way creditors protect themselves – they want to be able to go after whoever has the money.
A Guarantor Contribution Agreement is an agreement among the guarantors that if a creditor collects more than the equal share of the debt from one of them, the other guarantors will reimburse that person so that everyone is paying their fair share.
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