What is a Corporate Guarantee?
A corporate guarantee is an official letter where a guarantor becomes responsible for handling debt payments or takes overall responsibility for debt repayment in case the debtor defaults on the loan.
- A corporate guarantee is a legal agreement between a borrower, lender, and guarantor, whereby a corporation (e.g., an insurance company) takes responsibility for the debt repayment of the borrower provided it faced bankruptcy.
- A personal guarantee is a similar document to the corporate guarantee. The main difference is that the guarantor is an individual who takes the responsibility of handling a loan repayment in the event his enterprise goes bankrupt.
- A corporate guarantee can be either limited or unlimited.
Understanding Corporate Guarantees
The following parties are involved in a corporate guarantee:
- The lender: An entity lending money
- The debtor: An entity borrowing funds
- The guarantor: An individual who agrees to be liable for loan repayment if the debtor fails at loan repayment
The following data should be clearly stated in a corporate guarantee:
- The debtor’s name
- Details of the guarantor (e.g., name, contact info, address, etc.)
- The lender’s information (e.g., name, address)
- Statement of any limits to the guarantee (e.g., a maximum amount of being repaid by the guarantor)
- A witness’ signature (someone who is not directly involved in the guarantee)
It is important to always check the legal names of the guarantor, the lender, and the borrower in the document.
Types of Corporate Guarantees
Corporate guarantees can be limited and unlimited. A limited guarantee means that a guarantor will be liable for the debt of the borrower only to a certain extent. For example, in the image above, we can see that there is a limit of $1,000,000 to be paid to the lender by the guarantor if the debtor goes bankrupt despite that $5,000,000 was borrowed.
For an unlimited guarantee, the guarantor is not limited by a particular amount of money to be repaid and thus must repay the full balance. So, in case of an unlimited corporate guarantee, Rally Holdings will need to cover the whole $5,000,0000 of debt taken by the defaulted debtor.
Corporate Guarantee vs. Personal Guarantee
A personal guarantee is a legal promise of an individual to repay debt issued to a business. The individual is typically an executive or a partner.
The essence of personal guarantees is that a person who signed a personal guarantee agreement becomes liable for any outstanding debt if the company goes bankrupt. The guarantee provides an additional level of protection to the debt issuer who wants to be assured the loan will be repaid.
Moreover, executives can pledge their own assets as collateral and agree to repay debt from their personal funds in the event of default. Thus, the lender will be able to repossess the pledged asset if the borrower fails at debt repayment.
So, the main difference between a corporate guarantee and a personal guarantee is that of scale. When it comes to a corporate guarantee, a corporation takes the guarantor’s role, and the amount of borrowed funds is significantly higher compared to a personal guarantee.
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