guarantor

play
noun guar·an·tor \ ˌger-ən-ˈtȯr , ˌgär- , ˌga-rən- ; ˈgar-ən-tər , ˈgär- , ˈga-rən- \
Updated on: 26 Jul 2017

Definition of guarantor

1 :one that gives a guaranty (see 1guarantee 3)
2 :one that guarantees

Examples of guarantor in a Sentence

  1. the town police force is the guarantor of our safety

Recent Examples of guarantor from the Web

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Origin and Etymology of guarantor


Financial Definition of GUARANTOR

guarantor

What It Is

In general, a financial guarantee is a promise to take responsibility for another company's financial obligation if that company cannot meet its obligation. The entity assuming this responsibility is the guarantor.

How It Works

Let's assume XYZ Company has a subsidiary named ABC Company. ABC Company would like to build a new plant and thus would like to borrow $10 million from a bank. The bank will probably require XYZ Company to provide a financial guarantee of the loan. By doing so, XYZ Company becomes a guarantor -- it agrees to repay the loan using cash flows from other parts of its business if ABC Company is unable to generate enough cash on its own to repay the debt.

Often a parent company will offer a financial guarantee of bonds issued by one of the parent's subsidiaries, but there are plenty of other situations that might involve guarantees. For example, vendors sometimes require customers to become guarantors if the vendor is uncertain about the customer's ability to pay (this most often happens in transactions involving expensive equipment or other physical property). In these situations, a customer's bank might be a guarantor of the customer's payment, meaning that the bank will pay the vendor if the customer does not.

Financial guarantors don't always guarantee the entire amount of a liability. In bond issues, for example, the financial guarantor might only guarantee the repayment of interest or principal, but not both. Sometimes more than one company can be the guarantor on a security; in these cases, each guarantor is usually only responsible for a pro rata portion of the issue, but in other cases, each guarantor may be responsible for the other guarantors' portions if they also default on their responsibilities.

Railroad companies are well-known for their guaranteed bonds because in order for a railroad company to lease another company's railroad, the lessee must often guarantee the debt of the lessor.

Why It Matters

Financial guarantees mitigate risk, but it is important to note that they do not make a security risk-free. After all, it is still possible that even the guarantor can default on the liability if the liability is too large or if the guarantor is already struggling for other reasons. Regardless, guarantees provide an extra layer of security, which is why guaranteed securities often get higher credit ratings.

Historically, financial guarantors disclosed the nature and size of their guarantees in the notes to their financial statements. It is important to note that guarantees issued between parents and their subsidiaries do not have to be booked as balance sheet liabilities. Examples of this include a parent's guarantee of a subsidiary's debt to a third party or a subsidiary's guarantee of the parent's debt to a third party or another subsidiary.

All financial guarantees must, however, be disclosed. The guarantor must disclose the nature of the guarantee (terms, history, and events that would put the guarantor on the hook), the maximum potential liability under the guarantee, and any provisions that might enable the guarantor to recover any money paid out under the guarantee.


GUARANTOR Defined for English Language Learners

guarantor

play
noun

Definition of guarantor for English Language Learners

  • finance : a person who promises to pay back a loan if the original borrower does not pay it back


GUARANTOR Defined for Kids

guarantor

play
noun guar·an·tor \ ˌger-ən-ˈtȯr , ˌgär- \

Definition of guarantor for Students

:a person who gives a guarantee

Law Dictionary

guarantor

play
noun guar·an·tor \ ˌgar-ən-ˈtȯr, ˌgär-; ˈgar-ən-tər, ˈgär- \

legal Definition of guarantor

:one that makes or gives a guaranty


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