Guarantor: Definition, Example and Related Terms
What is a Guarantor ?
A Guarantor is an individual or an entity (like a business or a bank) who promises to pay a borrower's debt in case of the borrower's default. This promise is often made in a 'Guarantee Agreement' (or simple Guarantee). The Guarantor steps in to fulfill the obligations of the borrower if the borrower is unable to do so. This reduces the risk for the lender, making it more likely for the borrower to get the loan or the credit. For instance, in commercial contracts, a Guarantor might be required when a company seeks a loan to expand its business but doesn't have enough assets to use as collateral.
Example(s)
Scenario Description A tech startup, TechNovice, needs a loan from a bank, Reliable Bank, to fund its new project. The bank is hesitant to lend the money as TechNovice is relatively new with no substantial assets to back the loan. In this case, an established tech firm, TechExpert, acts as the Guarantor for TechNovice's loan. TechExpert signs a Guarantee Agreement with Reliable Bank. In this agreement, TechExpert promises to pay back the loan if TechNovice fails to do so. TechExpert becomes the Guarantor in this commercial contract, thus enabling TechNovice to get the loan. A manufacturer, MakeStuff Inc., wants to purchase raw materials from a supplier, SupplyCo. However, SupplyCo is unsure whether MakeStuff Inc. will be able to pay for the materials in time. Here, MakeStuff Inc.'s parent company, BigCorp, can act as the Guarantor. BigCorp promises to pay SupplyCo if MakeStuff Inc. fails to do so. This guarantee makes the supplier more confident about the business deal.