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To guarantee is to take responsibility for paying a debt or performing some obligation if the person who is primarily liable fails to do so. There are a number of different types of guarantees that credit professionals deal with. One of the more common is the personal guarantee of a business owner relating to the debts incurred by a corporation. Corporations are separate legal entities. The stockholders (the owners) of a corporation are normally not personally liable for the debts of the corporation unless they sign a personal guarantee. Inter-corporate guarantees are also widely used by trade creditors. As the name suggests, an inter-corporate guarantee involves the pledge by a company to be responsible for the debts of another company. Inter-corporate guarantees are popular when a trade creditor is asked to extend credit to a marginal company that is the subsidiary of a creditworthy parent company. In this scenario, the credit manager may seek to bolster the creditworthiness of the subsidiary by obtaining an inter-corporate guarantee from the parent company. (See also Corporate Guarantee) Edited by Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore. |
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