August 22, 2014

What Guarantors Need to Know About California Surety Law

With tighter lending standards prevailing after the financial crisis, many businesses, and in particular small businesses, have found that banks and other lenders are hesitant to make loans absent additional payment assurances.  Often this means the lender will require someone else to execute a guaranty (or “surety”) agreement “guaranteeing” the payment of the loan by the borrower (or “principal”).  The basic concept of the guaranty is simple: the “guarantor” agrees to pay the debt of the principal if the principal defaults on its payment obligation.  The guarantor may be another business entity, or an individual (often an owner of the borrower) who executes the guaranty agreement in his or her individual capacity.  If the loan is particularly large or risky, the bank may require that more than one entity or individual execute a guaranty. 

This article explains what guarantors need to know should they find themselves in the unfortunate position of evaluating their options after a borrower’s default.