In one sentence
A guaranty enforceable only after the lender has pursued the borrower and the collateral and can show a remaining deficiency.
The longer version
The guarantor's obligation is conditional. The lender must first exhaust its remedies, which in a real estate context usually means completing a foreclosure and establishing the shortfall before any claim against the guarantor ripens.
That sequence can take a long time, so lenders treat a collection guaranty as materially weaker than a payment guaranty when sizing credit. Where one is accepted, the credit file should record why, because the distinction affects how the exposure is classified.
Common questions
- Why do lenders prefer a guaranty of payment?
- Because it can be enforced on default without waiting for a foreclosure to conclude. A collection guaranty can add a year or more before the claim is even available.
- Does a collection guaranty still have value?
- Yes, but less. It still reaches the guarantor's assets for a proven deficiency, which matters where the sponsor has substantial outside net worth.
- Which form is standard?
- Payment guaranties are the market norm in commercial real estate lending. Collection guaranties appear where the guarantor has leverage or the credit is strong enough that the lender concedes the point.
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