Joint and several liability means each co-borrower is responsible for the entire loan, not just its share. The lender can collect the whole balance from any one of them, or from all of them in any combination, and take any of their pledged assets. Affiliated companies become co-borrowers when a lender finances a group whose cash, collateral or operations are shared: an operating company and the company that owns its building, sister operating companies under one line, or a holding company and the business it bought. Lenders require it so that moving cash or assets between entities cannot move them out of reach.
- Joint
- All co-borrowers are liable together
- Several
- Each co-borrower is liable on its own for the whole amount
- Common pairings
- Operating company and real estate company; sister companies; holding company and target
- Why lenders ask
- Cash, collateral and earnings are spread across entities that are run as one
- Each entity's exposure
- The full loan, its pledged assets, and every covenant and default in the agreement
What the phrase means
The two words describe two separate rights the lender has. Joint liability means the co-borrowers owe the debt together, so the lender can pursue all of them at once. Several liability means each one owes it individually, so the lender can pursue any one of them alone for the whole balance. Together, the lender chooses whom to collect from and in what order, and no co-borrower can insist the lender first go after the others, or limit its payment to the share of the proceeds it received.
The alternative, several-only liability, where each party owes a defined share, is common among investors in a syndicated loan but rare among borrowers. Lenders to private businesses almost never accept it, because a borrower group run as one business rarely keeps its assets and cash in the neat proportions a several-only structure assumes.
The same phrase appears in personal guarantees. When several owners guarantee a loan, each guarantee is usually for the whole loan, not the owner's percentage. Every owner of 20% or more personally guarantees an SBA loan, and those guarantees are for the full balance. See personal guarantees and limited vs unlimited guarantees.
How affiliated companies end up as co-borrowers
Private businesses are often split across several entities for good reasons: liability, tax, estate planning, or simply history. Lenders look through the split to the business as it actually runs. The common patterns:
- Operating company and real estate company. The owners hold the building in a separate company that leases it to the operating business. When one loan finances both, for example an SBA loan buying a business and its premises, both companies sign. Under SBA rules the real estate company is an eligible passive company and the operating company signs as co-borrower or guarantor; see eligible passive company and propco/opco structures.
- Sister operating companies. A group running several locations or trades through separate companies, with shared management, bank accounts and customers, borrows under one facility. On an asset-based line, their receivables usually feed a combined borrowing base, and each company is a borrower.
- Holding company and the business it bought. In a stock acquisition, the acquisition company and the target sign together so the loan reaches the target's cash flow and assets, avoiding structural subordination.
- Companies with common owners. Where the owners control other businesses that trade with the borrower, a lender may want them in the credit, as co-borrowers or guarantors. For SBA loans, affiliates also count toward size standards; see SBA affiliation rules.
Why lenders require it
Lenders underwrite the group's combined earnings, often on a global cash flow basis, so they need a claim on every entity whose earnings or assets are in that analysis. Three concerns drive it.
- Cash moves. In a group run as one business, cash flows between entities through rent, management fees, intercompany loans and shared accounts. If only one entity owes the lender, cash can end up in another entity that does not.
- Collateral is spread out. The receivables may be in one company, the equipment in another and the building in a third. Having all of them as borrowers lets the lender take a lien on everything that supports the loan.
- One default, one set of remedies. With all entities on the same note, a default by any one is a default of all, and the lender does not have to chase separate guarantees through separate proceedings.
Co-borrowing also has advantages for the group. A combined borrowing base can support more borrowing than separate lines, a real estate company's value can support a loan the operating company could not carry alone, and one set of documents and reporting is simpler than several.
Co-borrower, guarantor or separate loans
Lenders have more than one way to bring an affiliate into a credit. The differences are real, even though the lender's reach can end up similar.
| Co-borrower | Guarantor | Separate cross-defaulted loans | |
|---|---|---|---|
| Liability | Primary: owes the whole loan directly | Secondary in form, but usually a guarantee of payment the lender can call at once | Each entity owes only its own loan |
| Receives proceeds | Usually, or may | Usually not | Each its own |
| Covenants and reporting | Bound by all of them, usually tested on the combined group | Bound by the guarantee's terms, often the same covenants | Separate for each loan |
| Pledges its assets | Yes, under the security agreement | Usually, under its own security agreement | Each to its own loan, sometimes cross-collateralized |
| Effect of one entity's default | Default on the whole loan | Default under the guarantee and the loan | A cross-default clause spreads it to the others |
| Typical use | Groups run as one business; combined borrowing bases | Holding companies, real estate companies, owners | Different lenders or collateral for each entity |
Separate loans can still end up linked. A cross-default clause makes a default on one a default on the others, and cross-collateralization lets each loan's collateral secure all of them. Borrowers who think of their companies as financially separate should read those clauses as carefully as the co-borrower language.
What each entity is exposed to
An operating company and its owners' real estate company co-borrow 3,000, in plain numbers: 1,800 to buy the building and 1,200 for equipment and working capital. The owners think of the building company as owing 1,800 and the operating company as owing 1,200. The loan documents do not.
| What the owners assume | What the documents say | |
|---|---|---|
| Real estate company owes | 1,800 | All 3,000 |
| Operating company owes | 1,200 | All 3,000 |
| Building secures | The building loan | The whole loan, including working capital |
| If the operating company fails and the building sells for 2,000 | Building loan repaid, 200 left for the owners | All 2,000 goes to the lender, and 1,000 is still owed by both companies |
Beyond the balance itself, each co-borrower takes on:
- Every covenant. Financial covenants are usually tested on the combined group, and a breach anywhere is a breach everywhere. Negative covenants restrict every co-borrower's own borrowing, liens, distributions and asset sales; see negative covenants.
- The other entities' problems. A tax lien, lawsuit or judgment against one co-borrower can be an event of default for all.
- A harder exit. Selling one entity, or bringing in an outside investor at one level, needs the lender to release that entity, which it will usually do only on a paydown it agrees to. Plan the release terms up front if a sale of the real estate or a single location is foreseeable.
- Different owners, shared risk. Where the entities do not have identical owners, for example a real estate company owned by one family member, co-borrowing puts one owner's asset behind another's business. That needs the minority owners' informed consent and usually a written agreement between the entities.
A co-borrower owes the whole loan. The building company does not owe the building's share; it owes all of it.
Arrangements among the co-borrowers
Between themselves, co-borrowers can agree how they share the debt: who received which proceeds, who makes which payments, and who reimburses whom if one pays more than its share. These contribution and reimbursement rights are worth writing down, especially where owners differ or one entity may be sold. They do not affect the lender. Loan agreements typically make any claims between co-borrowers subordinate to the lender and suspend them until the loan is paid, so they cannot be used to pull value out of one entity ahead of the lender.
Two further practical points. Each entity's accountant should know about the full obligation, since each company is liable for all of it and its other lenders, landlords and bonding companies will ask. And the payments should flow through the books in a way that matches the written agreement, which keeps intercompany balances, rent and management fees clean for the next lender's review.
When Transparent prepares a package for a multi-entity business, the financing model and underwriting memo show each entity's earnings, assets and intercompany flows, and which entities will borrow or guarantee, so lenders price the group as it runs and the borrower sees the structure before signing. The documents a lender asks for, such as tax returns, P&L, balance sheet and debt schedule, are needed for each entity in the credit, not only the main operating company.
Common questions
- How is joint and several liability different from several liability?
- Under joint and several liability, the lender can collect the entire debt from any one co-borrower. Under several-only liability, each party owes only its defined share. Business loans to affiliated companies are almost always joint and several.
- Why does my real estate company have to sign the operating company's loan?
- Because the lender is underwriting both together: the operating company's earnings pay the rent that services the real estate, and the building supports the whole credit. Signing both makes every asset and every dollar of cash flow in the analysis available to the lender.
- Is being a co-borrower worse than being a guarantor?
- In practice the exposure is often similar, because most business guarantees are guarantees of payment the lender can call immediately. A co-borrower is directly liable on the note and bound by all its covenants; a guarantor's obligations are set by the guarantee.
- Can one co-borrower be released later?
- Only with the lender's agreement, usually on a paydown or a sale of that entity's assets at a price the lender accepts. Negotiating release terms at the outset is easier than later.
- Does each co-borrower need to provide financial statements?
- Usually, yes. Lenders ask for tax returns, P&L, balance sheet and debt schedule for every entity in the credit, and often combined or consolidated figures for the group.