In one sentence
A third party's promise to answer for the borrower's obligations, in full, in part, or only on specified bad acts.
The longer version
Payment guaranties cover the debt. Completion guaranties cover finishing construction. Carve-out guaranties spring only on specified acts like fraud, waste, or unauthorized transfers. Which flavor applies, and who signs it, is negotiated with the term sheet.
Diligence on the guarantor runs parallel to the borrower: organizational documents for entities, financial statements and net worth covenants either way.
Common questions
- What is a guaranty in a commercial loan?
- A third party's promise, usually the sponsor's, to answer for some or all of the borrower's obligations. It can cover the whole debt, a capped amount, completion of construction, or only specified bad acts.
- What is the difference between a payment guaranty and a carve-out guaranty?
- A payment guaranty makes the guarantor liable for the debt itself. A carve-out guaranty makes it liable only if specified acts occur, such as fraud or an unpermitted transfer, which is how non-recourse loans are structured.
- Why does the lender review the guarantor's financials?
- Because a guaranty is only as good as the guarantor. Lenders test net worth and liquidity at closing and often require them to be maintained and reported for the life of the loan.
Keep reading
- The commercial loan closing checklistWhat goes on the list and who owns each line.
- The CRE due diligence checklistEvery phase of diligence, organized the way deals close.
- What lenders check in a closing binderFour reviewers, four different reads.
- Loan closing softwareWhere this item is cleared before funding.