CREDIT MANAGEMENT
RISKS OF SIGNING
A PERSONAL
GUARANTEE
By Wasilwa Miriongi
O
ne day a friend called me
and he was so annoyed that
he applied for a loan and the
application had been rejected on the
basis that he guaranteed someone
in a group and that person has since
defaulted on payment resulting in
adverse listing with Credit Reference
Bureau – CRB.
This is now a common occurrence
where not only bank lending require
Guarantors, also group lending like
microfinance have that condition in
their loan covenants. The question
you may ask is what is a guarantee
and why is it necessary?
Www.investopedia.com defines a
guarantee as, an individual’s legal
promise to repay charges to a credit.
Providing a personal guarantee means
that if the business or an individual
becomes unable to repay his debts,
the individual guarantor is personally
responsible. The personal guarantee
provides an extra level of protection
to credit issuers who want to make
sure they will be repaid.
To answer the question, what is
a personal guarantee? A personal
guarantee is an unsecured written
promise from a business owner and
or business executive guaranteeing
‘‘ A personal guarantee is an unsecured
written promise from a business owner and
or business executive guaranteeing payment
on an equipment lease or loan in the event the
business does not pay. Since it is unsecured,
a personal guarantee is not tied to a specific
asset. However, in the event of non-payment a
lender can go after the guarantor’s
personal assets.’’
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payment on an equipment lease or
loan in the event the business does
not pay. Since it is unsecured, a
personal guarantee is not tied to a
specific asset. However, in the event
of non-payment a lender can go after
the guarantor’s personal assets.
Credit guarantees are used by lenders
as one of a pool of instruments
for risk mitigation and credit
enhancement measures. They
range from very simple to complex
arrangements using a blend of
structured finance instruments,
such as subordination and portfolio
concentration limits.
Generally speaking, a credit
guarantee simply substitutes part
of the collateral required from a
borrower; if the borrower fails to
repay, the lender can resort to partial
repayment from the guarantor. The
guarantor can be a separate company
or other form of distinct legal entity,
or part of a multi-purpose service
set-up, usually provided by the public
sector or development projects.
Types of Guarantees
The four main types of guarantees are