Commercial Loan GuaranteesBanker Resource
November 26, 2013 — 1,342 views
A guaranty is an agreement that has been made by a third party to pay and/or perform the commitments or obligations of a debtor to satisfy the debt that is owed to a creditor. This is generally upon the occurrence of a certain event, usually a default by the debtor, which is under the terms of the original loan agreement. Like any other contract, a guaranty requires definiteness, consideration and mutual assent. It must be in writing and signed by the guarantors.
A loan guaranty is usually meant to serve in the form of collateral that is meant for supporting the debt obligation between the creditor and debtor. The guaranty cannot exist without a primary debt obligation. This means that if the primary debt obligation is fully satisfied, becomes void or is illegal then a guaranty of that debt obligation is also not enforceable. The analysis of basic contract principles is necessary for the enforcement of a commercial guaranty. What makes a commercial guaranty a unique contract form is that it may lie unattended and unused for a long time by the parties involved up until the occurrence of some subsequent, significant event.
Whether a party is looking to enforce the clauses of a commercial guaranty or even defend against its enforcement, they need to begin with an identification of the specific guaranty type. With regard to their background, here are a few different types of guaranties:
- Absolute Guaranty – This type of guaranty has a provision stating that the guarantor promises to either pay or perform the obligations that have been set by the debtor. These obligations are to be performed upon the occurrence of an event of default. Any guaranty that does not have limiting words or conditions is typically taken to be an absolute guaranty.
- Conditional Guaranty – This type of guaranty requires that there is some happening of any contingent event, other than the debtor’s default, before the guarantor will become liable. The guarantor also becomes liable on the performance of some act by the creditor.
- Payment Guaranty – Such a guaranty makes it obligatory on the part of the guarantor to pay the debt at maturity. This may even arise due to an event of default. Upon such an occurrence, the obligation of the guarantor becomes fixed and the creditor need not make any demand on the debtor.
- Collection Guaranty – This guaranty is a promise from the guarantor that if collection of the claim cannot be carried out by the creditor with due diligence, the guarantor shall be paid by the creditor. This payment is usually after suit and exhaustion of other remedies against the debtor.
- Performance Guaranty – This guaranty makes it obligatory for the guarantor to perform some obligation of behalf of the debtor for the creditors benefit.
- Continuing Guaranty – This is not limited to a single transaction. It also contemplates a future dealing course. They include subsequent debts without new consideration.
- Restricted Guaranty – This is a guaranty that has been limited to a certain number of transactions, to a specific part of the debt obligation or to a certain period of time.
- Downstream Guaranty – A guaranty by a parent corporation for the obligations of its subsidiary.
- Upstream Guaranty – A guaranty by a subsidiary corporation for the obligations of its superior.
- Cross-stream Guaranty – A guaranty among affiliated corporations with stock that is owned by the same parent.
The loan guaranty agreement requires more attention than it is normally paid during commercial loans. Here it can be effectively tailored to suit the desires and needs of both the guarantor and the lender.