A loan guarantee is essentially a written pledge by an institution or an individual to take on the debt obligation of another institution or individual if the latter defaults on a loan. A simple example is that of a parent who co-signs a loan for her daughter's car note. The parent is guaranteeing to the lender that she will repay the loan if her daughter can't make her monthly car note payments.
It works in a similar manner in the business world. Loan guarantees are often offered by the United States Government to ensure that businesses can get the credit they need, especially in times of economic distress. Such guarantees can come from a variety of government departments at the federal or sometimes at the state levels. For example, the U. S. Department of Energy has a guarantee program that supports clean energy projects. It allows guarantees to be made to loans for specific-and qualified-energy-related projects that provide new technologies that will benefit the country as a whole. Other government departments may provide guarantees that accommodate housing construction for low income families. Still other departments guarantee loans that will benefit rural areas of the country through infrastructure improvements such as bridges or drainage projects.
This is a great way to gain corporate credit. But whatever the nature of the business or of the loan guarantee, there are specific qualifications that must be met by the borrower. These qualifications include a proven ability to repay a loan, the business owner's management capability and business expertise, the owner's existing equity in the business, as well as the owner's character. In other words, the business-and its owner-must be a good credit risk before a loan will be guaranteed.
And of course, getting a loan guarantee isn't as simple as calling up the U. S. Government and asking for one. In fact, business owners can't do it on their own. It is the lenders that must handle the acquisition of the guarantees, and they must meet their own eligibility requirements before guarantees for loans will be issued. Eligible lenders generally include banks, finance companies, credit unions, pension funds, and others. In order to take advantage of loan guarantees, lenders must prepare and submit the appropriate applications to the appropriate departments on behalf of their customers. Most lenders have staff members that are experienced in getting these guarantees, so businesses can rest assured that the process will be managed professionally.
Of course that doesn't mean that a business shouldn't perform its own due diligence in making sure that all the i's are dotted and all the t's are crossed. As with any legal contract, business owners or their representatives should review all of the paperwork involved in a guaranteed loan. The terms of the loan should be clear to all parties who are involved in the transaction. And just because a loan is guaranteed doesn't mean that the borrower isn't responsible for repaying it completely and on time. Having what amounts to a co-signer of sorts doesn't change the rules of the game. Stiff penalties can be incurred for those who default on such loans and those defaults will appear on the borrowers' credit reports. Too many such defaults could have serious repercussions beyond the borrowers themselves. It could impact an entity's willingness-and ability-to provide loan guarantees all together. And that impact could be felt far and wide, depending upon the government entity that is involved-possibly even affecting entire industries
Corporate Credit Concepts specializes in Loan Guarantee. For more information about Loan Guarantee and how it might benefit your business, please CLICK HERE for a free phone consultation.