Guarantor

A guarantor is the party who stands behind someone else's debt: if the primary obligor fails to pay, the creditor can demand payment from the guarantor. In trade credit the two common species are the individual guarantor (an owner or principal signing a personal guarantee) and the corporate guarantor (a parent company guaranteeing a subsidiary's purchases). Both convert an exposure to a weak entity into an exposure partly backed by a stronger one.

A guarantor is only as valuable as its assets and the enforceability of the guarantee. For corporate guarantees, verify that the guarantor entity actually has substance, since a guarantee from an empty holding company is decoration, and that the guarantee was properly authorized (a board resolution for significant amounts). Beware of comfort letters and letters of awareness, which parents sometimes offer instead of guarantees; most create moral encouragement, not enforceable obligation. For individual guarantors, existing judgments, other guarantees outstanding, and jointly held assets all affect real recoverability.

Track guarantees as living instruments. They should be continuing (covering future purchases, not just the current balance), stored where collections can find them on day one of a default, and reviewed when ownership changes, because a guarantee signed by an owner who has since sold the company may or may not survive depending on its terms. At default, the demand on the guarantor should go out with the demand on the debtor, not months later after the corporate collection effort has failed.