Continuing guarantee: Overview, definition, and example
What is a continuing guarantee?
A continuing guarantee is a type of guarantee that remains in effect for a series of transactions or an ongoing relationship, rather than just for a specific, one-time transaction. It involves a guarantor who agrees to take responsibility for the obligations of a debtor, typically a borrower, in the event the debtor fails to meet their obligations. This type of guarantee is often used in business and financial contexts to provide security for a lender or creditor over a period of time.
For example, a business owner might provide a continuing guarantee to a bank for the repayment of a line of credit, ensuring that the bank will be paid if the business defaults on its payments.
Why is a continuing guarantee important?
A continuing guarantee is important because it provides ongoing security for creditors, ensuring that they have a recourse if a borrower or debtor fails to meet their obligations over time. This type of guarantee is commonly used for loans, credit lines, or any arrangement where payments or obligations may occur repeatedly.
For businesses or lenders, continuing guarantees reduce risk by providing assurance that they can recover debts if the debtor defaults. For guarantors, understanding the scope of the guarantee is crucial because it means their liability may extend beyond a single transaction, potentially covering a series of debts or obligations.
Understanding continuing guarantee through an example
Imagine a business owner, Sarah, who borrows money from a bank to fund her company’s operations. To secure the loan, she provides a continuing guarantee, agreeing to be personally liable for the loan if the business defaults.
The guarantee applies not only to the initial loan but also to any future borrowings or credit extended to the business under the same agreement. Over time, if the business continues to take out loans or use the credit line, Sarah’s guarantee remains in place, covering all obligations, even if they are incurred after the original loan.
In another example, a supplier may require a continuing guarantee from a buyer to ensure payment for goods purchased on credit. If the buyer fails to pay, the guarantor is responsible for covering the outstanding balance for any purchases made under the agreement, even if those purchases are made months or years after the original agreement was signed.
An example of a continuing guarantee clause
Here’s how a continuing guarantee clause might appear in a contract:
“The Guarantor hereby guarantees the due and punctual payment of all amounts owing by the Borrower to the Lender, whether now existing or arising in the future, under this Agreement or any subsequent agreement. This Guarantee shall remain in full force and effect until all obligations of the Borrower have been discharged in full.”
Conclusion
A continuing guarantee provides lasting security for creditors by ensuring that a guarantor remains responsible for a borrower’s obligations over time. This type of guarantee is particularly useful in long-term or ongoing credit relationships, where the debtor’s obligations may fluctuate or extend beyond a single transaction.For businesses and lenders, a continuing guarantee mitigates the risk of non-payment, while for guarantors, understanding the long-term nature of the guarantee is essential for managing potential liability.
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.