Additional guarantors: Overview, definition, and example
What are additional guarantors?
Additional guarantors refer to individuals or entities that are added to an existing agreement to provide a guarantee for the obligations of a borrower or another party. These guarantors agree to take responsibility for fulfilling certain obligations, such as loan repayment, if the primary obligor fails to do so. Adding guarantors often strengthens the security of an agreement by providing additional parties who are legally bound to ensure performance.
Why are additional guarantors important?
Additional guarantors are important because they provide extra assurance to creditors or lenders that obligations will be met. For lenders, this reduces the risk of default by increasing the number of parties responsible for repayment. For businesses, adding guarantors can make it easier to secure financing or favorable terms.
This provision is particularly useful in complex financial arrangements, such as syndicated loans or multi-party agreements, where the involvement of additional guarantors can enhance the security and enforceability of the contract.
Understanding additional guarantors through an example
Corporate guarantee example: A parent company provides a corporate guarantee for its subsidiary’s loan. Later, the lender requires an additional guarantor, such as another subsidiary of the parent company, to further secure the loan. This ensures that if the borrower defaults, the lender can recover funds from multiple guarantors.
Personal guarantee example: A small business owner personally guarantees a business loan. As the business expands, the lender requests that another co-owner of the business also become an additional guarantor to share the responsibility of repayment.
An example of an additional guarantors clause
Here’s how an additional guarantors clause might appear in a contract:
“The Borrower agrees that, upon the occurrence of an event requiring additional guarantors under this Agreement, any person or entity meeting the Lender’s approval shall execute a guaranty agreement in form and substance satisfactory to the Lender. The additional guarantors shall assume joint and several liability for the obligations of the Borrower as outlined in this Agreement.”
Conclusion
Additional guarantors strengthen agreements by providing more parties to ensure the fulfillment of obligations, reducing risk for lenders or other creditors. For borrowers, agreeing to additional guarantors can make it easier to secure financing or comply with loan terms. Including a clear clause about additional guarantors in contracts ensures transparency and sets expectations for the process, rights, and obligations associated with adding new guarantors.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.