A guarantee is an undertaking by a third party for the debts of a primary debtor. The guarantor being liable for the debts of the principle debtor should he not pay.

Guarantees must be evidence in writing and comply with the following:

1. There must be three parties, the principle creditor, the principle debtor and the guarantor.
2. There must be primary liability in some person other than the guarantor, a guarantor must be liable only secondary, that is if the principal debtor does not pay. E.g. A and B go into a shop. B says to the shopkeeper let A have the goods, and if he does not pay you, I will. This is a contract of guarantee the primary liability being with A, and the second liability with B.
3. The guarantor is totally unconnected with the contract except by means of his promise to pay the loss. It would follow that a partner of a partnership could not give a guarantee.

Guarantees may be given for any amount and be either fixed or continuing. A continuing guarantee is where the guarantee is for an indefinite period.

A guarantee is usually given by the directors or members of a company either individually or collectively, a collective guarantee is called a joint and several guarantee and when given, all the guarantors are liable for the whole of the debt. These guarantees only require the full name and addresses of the guarantors and be signed and witnessed.

Guarantees given by one corporate body against another corporate body, would usually be given where the guarantor company owns all the shares in another company who is having difficulty in obtaining services/goods. Before these guarantees are valid they must be signed by an authorised person, usually a director.

Although guarantees are quite a common and effective means of giving credit when the principal debtor is not credit worthy, they should not be accepted until the guarantor has been vetted. Where a corporate body stands as guarantor this presents no difficulty as we are able to obtain the usual searches etc. In these circumstances, we must took to the guarantor's standing in the community which would include how long they had lived in the district, property owned,and are there any other business interests including directorships of other companies. A Directors search at Companies House could prove invaluable. There are now many resources on the Internet which can help you. You will find some helpful links in our Trace and Search Section in the Credit Services Area of our website.

Having satisfied ourselves that the guarantor is a responsible person, then there is no reason why a guarantee should not be accepted.

Worth of a guarantee

There are those who say that guarantees are worthless pieces of paper. Let us not forget that guarantees are not given lightly (conversely, they should not be accepted lightly). Responsible companies do not relish the possibility of winding up proceedings being taken against them. By the same token, individual guarantors have no wish to be made bankrupt.

Some other Fundamentals of Credit

1. Definition of Credit
2. Credit Assessment
3. Identifying the Debtor
4. Corporate Bodies
5. Some Sources of Finance
6. Credit Limits and Terms
7. Factors Relating to Doubtful and Bad Debts