Corporate Guarantee: Everything You Need to Know
A corporate guarantee is an agreement in which one party, called the guarantor, takes on the payments or responsibilities of a debt if the debtor defaults on the loan.3 min read
2. Who Are the Parties in a Guarantee?
3. Corporate vs. Personal Guarantor
4. What Is a Limited Guarantee?
5. What Information Needs to Be in a Guarantee?
6. How Enforceable Is a Corporate Guarantee?
Updated July 6, 2020:
A corporate guarantee is an agreement in which one party, called the guarantor, takes on the payments or responsibilities of a debt if the debtor defaults on the loan.
What Is a Guarantee?
A corporate guarantee is also written as a "guaranty" or "corporate guaranty." This guarantee benefits the debtor and the lender. For the lender, the loan is more secure since the guarantor assures that the money will be repaid. A debtor can become eligible for a loan that they wouldn't have otherwise qualified for, thanks to the assurance provided by the guarantor. Debtors with lower credit scores might need corporate guarantees to qualify for loans.
Other names for a corporate guarantee include:
- Third-party guarantee
- Guaranteed loan
Who Are the Parties in a Guarantee?
In a corporate guarantee, the parties refer to the entities or individuals that are responsible to fulfill any obligations outlined in the agreement. For most guarantees, the obligation is repaying funds that have been loaned to the debtor.
The three main parties in a standard corporate guarantee are:
- The guarantor, who is the individual agreeing to perform the legal obligation by taking over the payments of the loan if the debtor is unable to perform their obligation
- The lender, who is the person to whom the debt is owed
- The debtor, who is the individual receiving the money and who is responsible to pay back the loan
Corporate vs. Personal Guarantor
A personal guarantor is a person agreeing to take over the loan payment or other obligations for the debtor, as outlined in the agreement. A corporation that agrees to take on these obligations is a corporate guarantor.
What Is a Limited Guarantee?
In certain situations, a limited guarantee is used to limit the guarantor's obligation. For example, the guarantor might only have to pay back a certain amount of the debtor's loan instead of the full amount. In these circumstances, the guarantee document must clearly state the amount of the limited guarantee.
You might see a limited guarantee in a mortgage agreement. Instead of leveraging the full value of the property as a security measure, the guarantor would only be responsible for repaying part of the loan amount. In order for this agreement to be legally enforceable, the limits must be outlined in the loan agreement and signed by the guarantor.
What Information Needs to Be in a Guarantee?
Both corporate and personal guarantees should contain some specific information:
- Name of the debtor
- Name and address of the creditor or lender
- Name and contact information for the guarantor
- Any guarantee limits, such as the maximum amount or percentage of the loan that must be paid by the guarantor
- A signature by a witness, who cannot be involved in the agreement
How Enforceable Is a Corporate Guarantee?
Corporate guarantees are critical in business operations, especially in the case of receiving or creating credit. Most guarantees are granted to banks and other lenders. A bank is one of the forms of consensual security for collateral on loans. You may wonder whether guarantees are enforceable or if they are viable security forms.
A corporate guarantee is a contract between a corporate entity or individual and a debtor. In this contract, the guarantor agrees to take responsibility for the debtor's obligations, such as repaying a debt. When a company guarantees repayment of a loan granted to one of its subsidiaries, if the subsidiary defaults on the loan, the person who signed the agreement guarantees that the loan will be repaid.
In the past, judges in court cases have maintained that when a guarantor takes responsibility for the liability of someone else, that agreement becomes a legal, distinct, and enforceable contract between the creditor and the guarantor. Although it's easier to prove the legal creation and obligation contained in a personal guarantee, corporate guarantees may be harder to prove. In general, personal guarantees are easier to legally enforce, except in the case that one party alleges forgery, fraud, or coercion.
Corporate guarantees are more difficult to enforce because corporations have different structures with layers of people, including the board of directors, employees, and shareholders. Each of these individuals has a different role in the administration and management of company affairs, so the person signing might not have authorization to do so on behalf of the company.
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