Guarantor

A person or company that promises to repay a loan if the borrower does not. On a loan to an LLC or corporation, the guarantor is usually an owner.

Most commercial loans are made to a company formed to own one property or run one business. The guarantor is the person or parent company the lender can turn to if that borrower cannot pay.

The OCC’s handbook for examiners says a lender should weigh two things: whether the guarantor has the ability to support the loan, and whether the guarantor is willing to. It looks at income, liquidity, cash flow and contingent liabilities, expects the bank to verify the guarantor’s liquidity, and notes that a guarantor’s unpledged assets are not a substitute for equity in the project. A guaranty can be full or limited, for instance to interest only, to finishing construction, or to part of the principal.

SBA sets a fixed rule. Each person who owns 20 percent or more of the borrower must give an unlimited full guaranty, and each loan needs at least one guarantor.

A lender cannot simply require a spouse to sign. Under Regulation B, if the borrower qualifies alone, a creditor may not require the signature of a spouse or other person on the credit instrument, with exceptions tied to jointly owned property and collateral.

Go further

• Loan comps: Lenders that made loans like yours, by size and place.
• Deal summary builder: A one-page summary that names the guarantors and their support.
• Deal summary builder: Turn the facts of a deal into a clean one-page summary you can copy or print. Nothing is saved or sent.
• Guarantor strength and recourse, explained: A guaranty is the lender's second way out. Whether you sign one, how much it covers and what the lender checks before accepting it shape a commercial loan as much as the rate does.
• Global cash flow, explained step by step: A property can cover its loan while the people behind it cannot cover their other debts. Global cash flow is the test that looks at all of it at once.
• How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.

Related terms

• Personal guaranty: A signed promise by an individual, usually an owner, to repay a business or real estate loan personally if the borrowing company does not.
• Recourse: A lender's right to collect a loan from the borrower or guarantor personally, beyond the property or other collateral pledged for it.
• Non-recourse loan: A loan the lender can collect only from the property pledged for it, not from the guarantor personally, except for listed bad acts.
• Carve-out guaranty: A guaranty on a non-recourse loan that makes the guarantor personally liable only if the borrower commits listed acts, such as fraud or a voluntary bankruptcy.
• Global cash flow: The combined cash flow of a borrower, its owners and their other businesses, set against all of the debt payments those same parties owe.
• Post-closing liquidity: The cash and other liquid assets a borrower or guarantor still holds after paying the down payment and closing costs on a loan.
• Contingent liability: A debt a person or company would owe only if something happens, most often a guaranty of someone else's loan that the borrower then stops paying.
• SBA Form 413 (Personal Financial Statement): SBA's personal financial statement. Each 20 percent owner and each guarantor except a supplemental guarantor gives one, or the lender's own equivalent, signed and dated within 90 days.

Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.