Corporate Guarantee

A corporate guarantee lets a lender or supplier seek performance from a company other than the primary borrower under agreed conditions, such as a parent supporting a subsidiary or one group company supporting another. The guarantor takes a risk without necessarily receiving the loan proceeds, so directors need to understand why the promise benefits their own company.

The signed terms set the scope, since a guarantee may cover one loan, all obligations under a facility or future amounts within defined limits. A label such as "corporate guarantee" does not reveal the size of exposure, so read the definitions of guaranteed obligations, interest, fees and enforcement costs.

A capped principal amount may not be the same as a total cap, because interest and collection costs might be included or added depending on wording. Some guarantees continue until the lender releases them, even after a scheduled maturity if obligations remain, so ask for a clear termination and release process.

The Law Society's note on intra-group guarantees discusses legal considerations when one company supports another, but it is UK-oriented, so the applicable jurisdiction must be checked. A company cannot assume a group-level benefit is enough for every entity, as board approvals, solvency and creditor interests can matter.

Authority is a separate question, since the person signing must have power under the guarantor's constitutional documents and internal approvals, and a bank mandate to approve payments is not necessarily authority to bind the company to another borrower's debt; keep the signed board decision and supporting analysis with the contract. A lender may require a guarantee because the borrowing company lacks sufficient assets, history or cash flow, which does not make the support risk-free.

If the subsidiary fails, the parent may face a demand when group cash is already under pressure, so test simultaneous downside scenarios rather than assuming failures are independent. Financial reporting may require recognition, measurement or disclosure of a guarantee, and IFRS material on guarantees issued for other entities shows that classification and accounting depend on the promise's terms and applicable standards.

A financial guarantee can be treated differently from a performance guarantee, and finance should not leave material guarantees in an untracked off-balance-sheet folder. A guarantee is not the same as security, since the guarantor promises to pay or perform while a charge grants rights over specific assets under its own document.

A transaction may include both, so check whether the lender can claim directly from the guarantor, seize security, or must first pursue the borrower, according to the contract and law. Group finance teams should maintain a guarantee register recording borrower, beneficiary, facility, maximum exposure, start, expiry, security and release evidence, linked to signed documents and with an assigned owner who confirms status with lenders, because a spreadsheet amount can be stale after amendments, repayments or an acquisition.

When comparing guarantees, avoid double counting, since two guarantees supporting the same debt do not necessarily add two separate principal obligations to the group's external debt, although each guarantor has its own potential liability and exposure should be reported by legal entity with overlap identified. A guarantee can also affect borrowing capacity, because another lender may count contingent exposure in covenant or credit analysis.