by Guy-Michael Homa

Created on: November 24, 2009

A guarantee is basically a promise to satisfy the performance of an agreement. A guaranty is similar, but is used to satisfy the performance of a loan by an individual. Analysis of credit and guaranties is a discipline that only the most qualified people should perform. Investigating guaranties is never performed alone -it is part of the overall credit review of a business requesting a loan. It is a complex set of procedures beyond the scope of this article. This article will summarize the elements involved to investigate a business loan guaranty. Consult with your CPA or Banker for assistance before attempting to do it yourself.

Investigating a personal guaranty for business loans is part of commercial credit analysis. The credit-underwriting department of a commercial bank or business lending institution typically performs this analysis. Any institution or person considering the extension of credit related to a business can perform credit examination. All guarantors must complete a Personal Financial Statement accompanied by tax returns and sometimes-additional supporting financial statements. Guaranties are legal agreements that obligate a third party, usually a business owner or key corporate officer, to repay a business debt should the business entity default on its repayment of a credit facility. A guaranty is not a primary source or substitute of a borrower's credit worthiness.

Personal guarantees are frequently obtained from the owners of a corporation, partnership or any other form of a business entity. From the lender's perspective, a personal guaranty ensures the personal and business interests of the owners are equivalent. If the business entity defaults on the loan, the guarantor promises to cure the default. Since most guaranties are unsecured, their values are more psychological than tangible. However, a lender can ask for some type of personal collateral of the owner for additional security for the making the loan. For example, the lender may ask for a pledge of a secondary lien on the owner's home. The type of property pledged depends on the risk factors calculated by the lender. Some property holds greater security values than others.

Investigating the credit worthiness of a loan and a guarantor involves careful credit investigation. In commercial lending, banks will apply principles called the 5 Cs as a basis for credit examination. The 5 Cs are Character, Capacity, Capital, Conditions, and Collateral.

Character - This relates to the motivation

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