A guarantee is a backup promise. If the main borrower or contractor defaults, the guarantor must step in under the terms of the guarantee. Banks take guarantees to reduce credit risk; businesses issue them so counterparties will trade or lend. Related term guarantor is the person or firm giving that promise.
Key takeaways
- Signing as guarantor is real contingent debt; treat it like borrowing yourself.
- Limits, expiry dates and conditions should be written, not oral.
- Demand guarantees can be called with little room to argue the underlying dispute.
- Sovereign or bank guarantees change the risk profile of a project for lenders.