1. What is a guaranty?

The word "guaranty" is synonymous with security, warranty, and collateral. The word can also be used in conjunction with both security and collateral. In the finance world, a guaranty is another way of securing a transaction in the event of a business failure experienced by the borrower. There are other ways of securing a transaction and those will be discussed later.

Here is an example of a circumstance where a lender will require guaranties: if the entity seeking to borrow money is not credit worthy (it is a new project or it is an enterprise with little or no track record and no cash flow), then the proposed lender will seek ways to secure, collateralize, and guaranty the repayment of debt, especially in the event of a default. These ways include:

  • Obtain a security interest or lien on not just what the lender is financing, but on all assets of the borrower (including accounts receivable).
  • Take a collateral assignment of any material contracts (service provider contracts that the borrower may have with a local hospital, for example, to provide a specialty service).
  • Require personal and/or corporate guaranties.

The first two ways are generally straightforward, generally not terribly contentious, and usually both required and expected. The last one, however, personal and/or corporate guaranties, is where the most angst tends to come from - particularly on the borrower's side.

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